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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): OCTOBER 9, 2001
AMERICAN INTERNATIONAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-2592361
(STATE OR OTHER JURISDICTION OF 1-8787 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) (COMMISSION FILE NUMBER) IDENTIFICATION NO.)
70 PINE STREET
NEW YORK, NEW YORK 10270
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 770-7000
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(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
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ITEM 5. OTHER EVENTS
American International Group, Inc. (AIG) hereby files supplemental
financial statements and financial statement schedules for the three years ended
December 31, 2000 and for six months ended June 30, 2001 prepared in accordance
with Regulation S-X, together with Supplemental Selected Consolidated Financial
Data and Supplemental Management's Discussion and Analysis of Financial
Condition and Results of Operations, to retroactively reflect the acquisition of
American General Corporation as of August 29, 2001. Also included are Exhibit
12, Supplemental Computation of Ratios of Earnings to Fixed Charges, and Exhibit
23, Consents of Independent Accountants.
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL SELECTED CONSOLIDATED FINANCIAL DATA
The following Supplemental Selected Consolidated Financial Data, which has
been restated to give retroactive effect to the acquisition of American General
Corporation (AGC) on a pooling of interests basis, is presented in accordance
with generally accepted accounting principles. This data should be read in
conjunction with the supplemental financial statements and accompanying notes
included elsewhere herein.
(in millions, except per share amounts)
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YEARS ENDED DECEMBER 31, 2000 1999 1998 1997 1996
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Revenues(a)................................................ $ 57,035 $ 51,335 $ 45,967 $ 41,480 $ 38,039
General insurance:
Net premiums written..................................... 17,526 16,224 14,586 13,408 12,692
Net premiums earned...................................... 17,407 15,544 14,098 12,421 11,855
Adjusted underwriting profit............................. 785 669 531 490 450
Net investment income.................................... 2,701 2,517 2,192 1,854 1,691
Realized capital gains................................... 38 295 205 128 65
Operating income......................................... 3,524 3,481 2,928 2,472 2,206
Life insurance:
Premium income........................................... 17,173 15,480 13,725 13,171 12,067
Net investment income.................................... 10,664 9,505 8,357 6,620 5,821
Realized capital gains (losses).......................... (162) (148) (74) (9) 4
Operating income......................................... 4,822 4,210 3,596 2,954 2,496
Financial services operating income........................ 1,678 1,432 1,181 926 710
Asset management operating income.......................... 1,161 920 688 502 442
Equity in income of minority-owned insurance operations.... -- -- 40 114 99
Other realized capital gains (losses)...................... (190) (44) (1) 11 50
Other income (deductions)-net.............................. (972) (600) (849) (596) (455)
Income before income taxes and minority interest........... 10,023 9,399 7,583 6,383 5,548
Income taxes............................................... 2,971 2,833 2,190 1,927 1,600
Income before minority interest............................ 7,052 6,566 5,393 4,456 3,948
Minority interest.......................................... (413) (380) (347) (203) (124)
Net income................................................. 6,639 6,186 5,046 4,253 3,824
Earnings per common share(b):
Basic.................................................... 2.55 2.37 1.96 1.66 1.49
Diluted.................................................. 2.52 2.34 1.92 1.64 1.47
Cash dividends per common share(c)......................... .14 .13 .11 .10 .09
Total assets............................................... 426,671 383,685 338,783 280,234 246,464
Long-term debt(d).......................................... 38,069 34,583 33,655 26,953 26,458
Capital funds (shareholders' equity)....................... 47,439 39,641 38,909 34,168 30,549
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(a) Represents the sum of general net premiums earned, life premium income, net
investment income, financial services commissions, transaction and other
fees, asset management commissions and other fees, equity in income of
minority-owned insurance operations, and realized capital gains (losses).
Commencing in 1997, agency operations were presented as a component of
general insurance and 1996 agency results have been reclassified to conform
to this presentation.
(b) Per share amounts for all periods presented have been retroactively adjusted
to reflect all stock dividends and splits and reflect the adoption of the
Statement of Financial Accounting Standards No. 128 "Earnings per Share."
(c) Cash dividends have not been restated to reflect dividends paid by
SunAmerica Inc., the Maryland corporation which was merged into AIG on
January 1, 1999, and AGC.
(d) Including commercial paper and excluding that portion of long-term debt
maturing in less than one year.
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SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
American International Group, Inc. and Subsidiaries
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Annual Report and other publicly available documents may include, and AIG's
officers and representatives may from time to time make, statements which may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are not historical
facts but instead represent only AIG's belief regarding future events, many of
which, by their nature, are inherently uncertain and outside of AIG's control.
These statements may address, among other things, AIG's strategy for growth,
product development, regulatory approvals, market position, financial results
and reserves. It is possible that AIG's actual results and financial condition
may differ, possibly materially, from the anticipated results and financial
condition indicated in these forward-looking statements. Important factors that
could cause AIG's actual results to differ, possibly materially, from those in
the specific forward-looking statements are discussed throughout this
Management's Discussion and Analysis of Financial Condition and Results of
Operations. AIG is not under any obligation to (and expressly disclaims any such
obligations to) update or alter any forward-looking statement, whether written
or oral, that may be made from time to time, whether as a result of new
information, future events or otherwise.
OPERATIONAL REVIEW
GENERAL INSURANCE OPERATIONS
AIG's general insurance subsidiaries are multiple line companies writing
substantially all lines of property and casualty insurance.
Domestic general insurance operations are comprised of the Domestic
Brokerage Group (DBG), which includes The Hartford Steam Boiler Inspection and
Insurance Company (HSB) and the domestic operations of Transatlantic Holdings,
Inc. (Transatlantic), Personal Lines, including 21st Century Insurance Group
(21st Century), and Mortgage Guaranty.
Commencing with the third quarter of 1998, Transatlantic and 21st Century
were consolidated into AIG's financial statements, as a result of AIG obtaining
majority ownership. HSB was acquired on November 22, 2000 and consolidated into
AIG's financial statements during the fourth quarter of 2000.
DBG is AIG's primary domestic division. DBG writes substantially all
classes of business insurance, accepting such business mainly from insurance
brokers. This provides DBG the opportunity to select specialized markets and
retain underwriting control. Any licensed broker is able to submit business to
DBG without the traditional agent-company contractual relationship, but such
broker usually has no authority to commit DBG to accept a risk.
Personal Lines engages in the mass marketing of personal lines insurance,
primarily private passenger auto and homeowners and personal umbrella coverages.
Mortgage Guaranty provides guaranty insurance on conventional first
mortgage loans on single family dwellings and condominiums.
AIG's Foreign General insurance group accepts risks primarily underwritten
through American International Underwriters (AIU), a marketing unit consisting
of wholly owned agencies and insurance entities. The Foreign General insurance
group also includes business written by AIG's foreign-based insurance
subsidiaries for their own accounts. The Foreign General insurance group uses
various marketing methods to write both business and personal lines insurance
with certain refinements for local laws, customs and needs. AIU operates in over
70 countries in Asia, the Pacific Rim, Europe, Africa, Middle East and Latin
America. Transatlantic's foreign operations are included in this group. (See
also Note 18 of Notes to Financial Statements.)
General insurance operations for the twelve month periods ending December
31, 2000, 1999 and 1998 were as follows:
(IN MILLIONS)
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2000 1999 1998
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Net premiums written*:
Domestic $11,768 $10,856 $ 9,976
Foreign 5,758 5,368 4,610
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Total $17,526 $16,224 $14,586
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Net premiums earned*:
Domestic $11,739 $10,263 $ 9,659
Foreign 5,668 5,281 4,439
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Total $17,407 $15,544 $14,098
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Adjusted underwriting profit*:
Domestic $ 450 $ 368 $ 15
Foreign 335 301 516
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Total $ 785 $ 669 $ 531
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Net investment income:
Domestic $ 2,076 $ 1,995 $ 1,754
Foreign 625 522 438
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Total $ 2,701 $ 2,517 $ 2,192
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Operating income before
realized capital gains*:
Domestic $ 2,526 $ 2,363 $ 1,769
Foreign 960 823 954
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Total 3,486 3,186 2,723
Realized capital gains 38 295 205
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Operating income $ 3,524 $ 3,481 $ 2,928
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* Reflects the realignment of certain internal divisions.
In AIG's general insurance operations, 2000 net premiums written and net
premiums earned increased 8.0 percent and 12.0 percent, respectively, from those
of 1999. During 2000, AIG
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American International Group, Inc. and Subsidiaries
cancelled or non-renewed approximately $380 million of business worldwide that
did not meet AIG's underwriting standards. In 1999, net premiums written
increased 11.2 percent and net premiums earned increased 10.3 percent when
compared to 1998.
General insurance domestic net premiums written and net premiums earned
were as follows:
(IN MILLIONS)
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2000 1999 1998
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Net premiums written:
DBG* $ 8,805 $ 8,297 $ 8,191
Personal Lines 2,510 2,162 1,422
Mortgage Guaranty 453 397 363
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Total* $11,768 $10,856 $ 9,976
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Net premiums earned:
DBG* $ 8,886 $ 7,788 $ 8,002
Personal Lines 2,401 2,079 1,280
Mortgage Guaranty 452 396 377
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Total* $11,739 $10,263 $ 9,659
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* Reflects the realignment of certain internal divisions.
Commencing in the latter part of 1999 and continuing through 2000, the
commercial property-casualty market place has experienced rate increases.
Virtually all areas of DBG have experienced rate increases. Overall, DBG's net
premiums written increased $508 million or 6.1 percent in 2000 over 1999. These
increases compared to an increase of $106 million or 1.3 percent in 1999 over
1998.
Personal Lines' net premiums written increased 16.1 percent or $348 million
in 2000 over 1999, compared to an increase of 52.0 percent or $740 million in
1999 over 1998. The growth in 2000 primarily resulted from an increase in the
number of policies issued with respect to preferred, standard and non-standard
auto risks. 21st Century was consolidated into AIG's Personal Lines results for
the twelve months of 1999 and last six months of 1998. Approximately half the
growth in 1999 over 1998 was attributable to the inclusion of twelve months of
operations of 21st Century. The remainder of the growth was due to the
aforementioned growth in policy issuance. AIG has filed for rate increases in a
number of states where inadequate rates persist.
Growth of 7.3 percent for both foreign general insurance net premiums
written and net premiums earned in 2000 over 1999 reflect growth of operations
in the United Kingdom, Continental Europe and the Far East. Growth of 16.4
percent and 19.0 percent for foreign general insurance net premiums written and
net premiums earned, respectively, reflect growth of operations in the same
aforementioned geographic regions and the consolidation of Transatlantic's
foreign operations for twelve months in 1999 compared to six months in 1998.
Foreign general insurance operations produced 32.9 percent of the general
insurance net premiums written in 2000, 33.1 percent in 1999 and 31.6 percent in
1998.
Differences in foreign exchange rates during 2000 relative to 1999 had a
negligible effect on foreign general insurance net premiums written when
translated from original currencies into U.S. dollars. (See also the discussion
under "Capital Resources" herein.)
Because of the nature and diversity of AIG's operations and the continuing
rapid changes in the insurance industry worldwide, together with the factors
discussed above, it is difficult to assess further or project future growth in
AIG's net premiums written and reserve for losses and loss expenses.
Net premiums written are initially deferred and earned based upon the terms
of the underlying policies. The net unearned premium reserve constitutes
deferred revenues which are generally earned ratably over the policy period.
Thus, the net unearned premium reserve is not fully recognized as net premiums
earned until the end of the policy period.
AIG, along with most general insurance entities, uses the loss ratio, the
expense ratio and the combined ratio as measures of performance. The loss ratio
is the sum of losses and loss expenses incurred divided by net premiums earned.
The expense ratio is statutory underwriting expenses divided by net premiums
written. The combined ratio is the sum of the loss ratio and the expense ratio.
These ratios are relative measurements that describe for every $100 of net
premiums earned or written, the cost of losses and statutory expenses,
respectively. The combined ratio presents the total cost per $100 of premium
production. A combined ratio below 100 demonstrates underwriting profit; a
combined ratio above 100 demonstrates underwriting loss. The statutory general
insurance ratios were as follows:
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2000 1999 1998
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Domestic:
Loss Ratio 81.00 81.30 83.98
Expense Ratio 16.94 16.33 16.06
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Combined Ratio 97.94 97.63 100.04
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Foreign:
Loss Ratio 63.44 64.27 57.32
Expense Ratio 30.65 29.95 30.96
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Combined Ratio 94.09 94.22 88.28
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Consolidated:
Loss Ratio 75.28 75.51 75.59
Expense Ratio 21.45 20.84 20.77
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Combined Ratio 96.73 96.35 96.36
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AIG believes that underwriting profit is the true measure of the
performance of the core business of a general insurance company.
Underwriting profit is measured in two ways: statutory underwriting profit
and Generally Accepted Accounting Principles (GAAP) underwriting profit.
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Statutory underwriting profit is arrived at by reducing net premiums earned
by net losses and loss expenses incurred and net expenses incurred. Statutory
accounting differs from GAAP, as statutory accounting requires immediate expense
recognition and ignores the matching of revenues and expenses as required by
GAAP. That is, for statutory purposes, all expenses, most specifically
acquisition expenses, are recognized immediately, not consistent with the
revenues earned.
A basic premise of GAAP accounting is the recognition of expenses at the
same time revenues are earned, the principle of matching. Therefore, to convert
underwriting results to a GAAP basis, acquisition expenses are deferred and
recognized together with the related revenues. Accordingly, the statutory
underwriting profit has been adjusted as a result of acquisition expenses being
deferred as required by GAAP. Thus, "adjusted underwriting profit" is a GAAP
measurement which can be viewed as gross margin or an intermediate subtotal in
calculating operating income and net income.
A major part of the discipline of a successful general insurance company is
to produce an underwriting profit, exclusive of investment income. If
underwriting is not profitable, losses incurred are a major factor. The result
is that the premiums are inadequate to pay for losses and expenses and produce a
profit; therefore, investment income must be used to cover underwriting losses.
If assets and the income therefrom are insufficient to pay claims and expenses
over extended periods, an insurance company cannot survive. For these reasons,
AIG views and manages its underwriting operations separately from its investment
operations.
The adjusted underwriting profits were $785 million in 2000, $669 million
in 1999 and $531 million in 1998. Domestic adjusted underwriting profit
increased primarily as a result of the disciplined underwriting of DBG. In 1999,
foreign underwriting profit declined primarily as a result of catastrophe losses
from European storms. The regulatory, product type and competitive environment
as well as the degree of litigation activity in any one country varies
significantly. These factors have a direct impact on pricing and consequently
profitability as reflected by adjusted underwriting profit and statutory general
insurance ratios. (See also Notes 4 and 18 of Notes to Financial Statements.)
AIG's results reflect the net impact of incurred losses from catastrophes
approximating $44 million in 2000, $156 million in 1999 and $110 million in
1998. AIG's gross incurred losses from catastrophes approximated $112 million in
2000, $472 million in 1999 and $625 million in 1998. The impact of losses caused
by catastrophes can fluctuate widely from year to year, making comparisons of
recurring type business more difficult. The pro forma table below excludes
catastrophe losses in order to present comparable results of AIG's recurring
core underwriting operations. The pro forma consolidated statutory general
insurance ratios would be as follows:
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2000 1999 1998
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Loss Ratio 75.03 74.51 74.81
Expense Ratio 21.45 20.84 20.77
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Combined Ratio 96.48 95.35 95.58
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AIG's historic ability to maintain its combined ratio below 100 is
primarily attributable to the profitability of AIG's foreign general insurance
operations and AIG's emphasis on maintaining its disciplined underwriting,
especially in the domestic specialty markets. In addition, AIG does not seek net
premium growth where rates do not adequately reflect its assessment of
exposures.
General insurance net investment income in 2000 increased 7.3 percent when
compared to 1999. In 1999, net investment income increased 14.8 percent over
1998. The growth in net investment income in each of the three years was
primarily attributable to new cash flow for investment and the consolidation of
Transatlantic and 21st Century for twelve months in 1999 compared to six months
in 1998. The new cash flow was generated from net general insurance operating
cash flow and included the compounding of previously earned and reinvested net
investment income. (See also the discussion under "Liquidity" herein and Note 8
of Notes to Financial Statements.)
General insurance realized capital gains were $38 million in 2000, $295
million in 1999 and $205 million in 1998. These realized gains resulted from the
ongoing management of the general insurance investment portfolios within the
overall objectives of the general insurance operations and arose primarily from
the disposition of equity securities and available for sale fixed maturities as
well as redemptions of fixed maturities.
General insurance operating income in 2000 increased 1.3 percent when
compared to 1999. The 1999 results reflect an increase of 18.9 percent from
1998. The contribution of general insurance operating income to income before
income taxes and minority interest was 35.2 percent in 2000 compared to 37.0
percent in 1999 and 38.6 percent in 1998.
AIG is a major purchaser of reinsurance for its general insurance
operations. AIG is cognizant of the need to exercise good judgment in the
selection and approval of both domestic and foreign companies participating in
its reinsurance programs. AIG insures risks in over 70 countries and its
reinsurance programs must be coordinated in order to provide AIG the level of
reinsurance protection that AIG desires. These reinsurance arrangements do not
relieve AIG from its direct obligations to its insureds.
AIG's general reinsurance assets amounted to $22.90 billion and resulted
from AIG's reinsurance arrangements. Thus, a credit exposure existed at December
31, 2000 with respect to reinsurance recoverable to the extent that any
reinsurer may not be able to reimburse AIG under the terms of these reinsurance
arrangements. AIG manages its credit risk in its reinsurance relationships by
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American International Group, Inc. and Subsidiaries
transacting with reinsurers that it considers financially sound, and when
necessary AIG holds substantial collateral in the form of funds, securities
and/or irrevocable letters of credit. This collateral can be drawn on for
amounts that remain unpaid beyond specified time periods on an individual
reinsurer basis. At December 31, 2000, approximately 43 percent of the general
reinsurance assets were from unauthorized reinsurers. In order to obtain
statutory recognition, nearly all of these balances were collateralized. The
remaining 57 percent of the general reinsurance assets were from authorized
reinsurers and over 95 percent of such balances are from reinsurers rated
A-(excellent) or better, as rated by A.M. Best. This rating is a measure of
financial strength. The terms authorized and unauthorized pertain to regulatory
categories, not creditworthiness.
AIG maintains an allowance for estimated unrecoverable reinsurance and has
been largely successful in its previous recovery efforts. At December 31, 2000,
AIG had allowances for unrecoverable reinsurance approximating $76 million. At
that date AIG had no significant reinsurance recoverables from any individual
reinsurer which is financially troubled (e.g., liquidated, insolvent, in
receivership or otherwise subject to formal or informal regulatory restriction).
AIG's Reinsurance Security Department conducts ongoing detailed assessments
of the reinsurance markets and current and potential reinsurers, both foreign
and domestic. Such assessments include, but are not limited to, identifying if a
reinsurer is appropriately licensed, and has sufficient financial capacity, and
the local economic environment in which a foreign reinsurer operates. This
department also reviews the nature of the risks ceded and the need for
collateral. In addition, AIG's Credit Risk Committee reviews the credit limits
for and concentrations with any one reinsurer.
AIG enters into certain intercompany reinsurance transactions for its
general and life operations. AIG enters these transactions as a sound and
prudent business practice in order to maintain underwriting control and spread
insurance risk among various legal entities. These reinsurance agreements have
been approved by the appropriate regulatory authorities. All material
intercompany transactions have been eliminated in consolidation.
At December 31, 2000, the consolidated general reinsurance assets of $22.90
billion include reinsurance recoverables for paid losses and loss expenses of
$3.33 billion and $15.66 billion with respect to the ceded reserve for losses
and loss expenses, including ceded losses incurred but not reported (IBNR)
(ceded reserves). The ceded reserves represent the accumulation of estimates of
ultimate ceded losses including provisions for ceded IBNR and loss expenses. The
methods used to determine such estimates and to establish the resulting ceded
reserves are continually reviewed and updated. Any adjustments therefrom are
reflected in income currently. It is AIG's belief that the ceded reserves at
December 31, 2000 were representative of the ultimate losses recoverable. In the
future, as the ceded reserves continue to develop to ultimate amounts, the
ultimate loss recoverable may be greater or less than the reserves currently
ceded.
At December 31, 2000, general insurance reserves for losses and loss
expenses (loss reserves) amounted to $40.61 billion. These loss reserves
represent the accumulation of estimates of ultimate losses, including IBNR, and
loss expenses and amounts of discounting related to certain workers'
compensation claims. At December 31, 2000, general insurance net loss reserves
increased $117 million from prior year end to $24.95 billion. The net loss
reserves represent loss reserves reduced by reinsurance recoverables, net of an
allowance for unrecoverable reinsurance. The methods used to determine such
estimates and to establish the resulting reserves are continually reviewed and
updated. Any adjustments resulting therefrom are reflected in operating income
currently. It is management's belief that the general insurance net loss
reserves are adequate to cover all general insurance net losses and loss
expenses as at December 31, 2000. In the future, if the general insurance net
loss reserves develop deficiently, such deficiency would have an adverse impact
on such future results of operations.
In a very broad sense, the general loss reserves can be categorized into
two distinct groups: one group being long tail casualty lines of business. Such
lines include excess and umbrella liability, directors and officers' liability,
professional liability, medical malpractice, general liability, products'
liability, and related classes. These lines account for approximately one-half
of net losses and loss expenses. The other group is short tail lines of business
consisting principally of property lines, certain classes of casualty lines and
includes personal lines.
Estimation of ultimate net losses and loss expenses (net losses) for long
tail casualty lines of business is a complex process and depends on a number of
factors, including the line and volume of the business involved. In the more
recent accident years of long tail casualty lines there is limited statistical
credibility in reported net losses. That is, a relatively low proportion of net
losses would be reported claims and expenses and an even smaller proportion
would be net losses paid. A relatively high proportion of net losses would
therefore be IBNR.
A variety of actuarial methods and assumptions are normally employed to
estimate net losses for long tail casualty lines. These methods ordinarily
involve the use of loss trend factors intended to reflect the estimated annual
growth in loss costs from one accident year to the next. For the majority of
long tail casualty lines, net loss trend factors approximated four percent. Loss
trend factors reflect many items including changes in claims handling, exposure
and policy forms and current and future estimates of monetary inflation and
social inflation. Thus, many factors are implicitly considered in estimating the
year to year growth in loss costs. Therefore, AIG's carried net long tail loss
reserves are judgmentally set as well as tested for reasonableness using the
most appropriate loss trend factors for each class of business. In the
evaluation of AIG's net loss reserves, loss trend factors vary slightly,
depending on the particular class and nature of the business involved. These
factors are periodically reviewed and subsequently adjusted, as appropriate, to
reflect emerging trends which are based upon past loss experience.
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Estimation of net losses for short tail business is less complex than for
long tail casualty lines. Loss cost trends for many property lines can generally
be assumed to be similar to the growth in exposure of such lines. For example,
if the fire insurance coverage remained proportional to the actual value of the
property, the growth in property's exposure to fire loss can be approximated by
the amount of insurance purchased.
For other property and short tail casualty lines, the loss trend is
implicitly assumed to grow at the rate that reported net losses grow from one
year to the next. The concerns noted above for longer tail casualty lines with
respect to the limited statistical credibility of reported net losses generally
do not apply to shorter tail lines.
AIG continues to receive claims asserting injuries from toxic waste,
hazardous substances, and other environmental pollutants and alleged damages to
cover the cleanup costs of hazardous waste dump sites (hereinafter referred to
collectively as environmental claims) and indemnity claims asserting injuries
from asbestos. The vast majority of these asbestos and environmental claims
emanate from policies written in 1984 and prior years. AIG has established a
specialized claims unit which investigates and adjusts all such asbestos and
environmental claims. Commencing in 1985, standard policies contained an
absolute exclusion for pollution related damage. However, AIG currently
underwrites environmental impairment liability insurance on a claims made basis
and excluded such claims from the analyses included herein.
Estimation of asbestos and environmental claims loss reserves is a
difficult process. These asbestos and environmental claims cannot be estimated
by conventional reserving techniques as previously described. Quantitative
techniques frequently have to be supplemented by subjective considerations
including managerial judgment. Significant factors which affect the trends which
influence the development of asbestos and environmental claims are the
inconsistent court resolutions and judicial interpretations which broaden the
intent of the policies and scope of coverage. The current case law can be
characterized as still evolving and there is little likelihood that any firm
direction will develop in the near future. Additionally, the exposure for
cleanup costs of hazardous waste dump sites involves issues such as allocation
of responsibility among potentially responsible parties and the government's
refusal to release parties. The cleanup cost exposure may significantly change
if potential Congressional reauthorization of Superfund dramatically changes the
current program.
In the interim, AIG and other industry members have and will continue to
litigate the broadening judicial interpretation of the policy coverage and the
liability issues. At the current time, it is not possible to determine the
future development of asbestos and environmental claims with the same degree of
reliability as is the case for other types of claims. Such development will be
affected by the extent to which courts continue to expand the intent of the
policies and the scope of the coverage, as they have in the past, as well as by
the changes in Superfund and waste dump site coverage issues. Although the
estimated liabilities for these claims are subject to a significantly greater
margin of error than for other claims, the reserves carried for these claims at
December 31, 2000 are believed to be adequate as these reserves are based on the
known facts and current law. Furthermore, as AIG's net exposure retained
relative to the gross exposure written was lower in 1984 and prior years, the
potential impact of these claims is much smaller on the net loss reserves than
on the gross loss reserves. In the future, if the environmental claims develop
deficiently, such deficiency would have an adverse impact on future results of
operations. (See the previous discussion on reinsurance collectibility herein.)
The majority of AIG's exposures for asbestos and environmental claims are
excess casualty coverages, not primary coverages. Thus, the litigation costs are
treated in the same manner as indemnity reserves. That is, litigation expenses
are included within the limits of the liability AIG incurs. Individual
significant claim liabilities, where future litigation costs are reasonably
determinable, are established on a case basis.
A summary of reserve activity, including estimates for applicable IBNR,
relating to asbestos and environmental claims separately and combined at
December 31, 2000, 1999 and 1998 follows.
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American International Group, Inc. and Subsidiaries
(IN MILLIONS)
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2000 1999 1998
-------------- --------------- ---------------
GROSS NET GROSS NET GROSS NET
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ASBESTOS:
Reserve for losses and loss expenses at beginning of year $1,093 $306 $ 964 $ 259 $ 842 $ 195
Losses and loss expenses incurred 405 80 404 101 375 111
Losses and loss expenses paid (398) (48) (275) (54) (253) (47)
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Reserve for losses and loss expenses at end of year $1,100 $338 $1,093 $ 306 $ 964 $ 259
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ENVIRONMENTAL:
Reserve for losses and loss expenses at beginning of year $1,519 $585 $1,535 $ 605 $1,467 $ 592
Losses and loss expenses incurred (44) (45) 127 47 284 107
Losses and loss expenses paid (130) (23) (143) (67) (216) (94)
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Reserve for losses and loss expenses at end of year $1,345 $517 $1,519 $ 585 $1,535 $ 605
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COMBINED:
Reserve for losses and loss expenses at beginning of year $2,612 $891 $2,499 $ 864 $2,309 $ 787
Losses and loss expenses incurred 361 35 531 148 659 218
Losses and loss expenses paid (528) (71) (418) (121) (469) (141)
------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $2,445 $855 $2,612 $ 891 $2,499 $ 864
------------------------------------------------------------------------------------------------------------------
The gross and net IBNR included in the aforementioned reserve for losses
and loss expenses at December 31, 2000, 1999 and 1998 were estimated as follows:
(IN MILLIONS)
------------------------------------------------------------------------------------------------------------------
2000 1999 1998
-------------- ------------- -------------
GROSS NET GROSS NET GROSS NET
------------------------------------------------------------------------------------------------------------------
Combined $1,042 $314 $930 $352 $979 $359
------------------------------------------------------------------------------------------------------------------
A summary of asbestos and environmental claims count activity for the years
ended December 31, 2000, 1999 and 1998 was as follows:
--------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------------- ----------------------------------- ------------------------
ASBESTOS ENVIRONMENTAL COMBINED ASBESTOS ENVIRONMENTAL COMBINED ASBESTOS ENVIRONMENTAL
--------------------------------------------------------------------------------------------------------------------------------
Claims at beginning of
year 6,746 13,432 20,178 6,388 16,560 22,948 6,150 17,422
Claims during year:
Opened 650 1,697 2,347 946 2,040 2,986 887 3,502
Settled (101) (584) (685) (225) (876) (1,101) (81) (677)
Dismissed or otherwise
resolved (499) (3,222) (3,721) (363) (4,292) (4,655) (568) (3,687)
--------------------------------------------------------------------------------------------------------------------------------
Claims at end of year 6,796 11,323 18,119 6,746 13,432 20,178 6,388 16,560
--------------------------------------------------------------------------------------------------------------------------------
-------------------------- --------
1998
--------
COMBINED
-------------------------- --------
Claims at beginning of
year 23,572
Claims during year:
Opened 4,389
Settled (758)
Dismissed or otherwise
resolved (4,255)
----------------------------------------------
Claims at end of year 22,948
-------------------------------------------------------
7
9
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The average cost per claim settled, dismissed or otherwise resolved for the
years ended December 31, 2000, 1999 and 1998 was as follows:
------------------------------------------------------------
GROSS NET
------------------------------------------------------------
2000
Asbestos $663,300 $80,000
Environmental 34,200 6,000
Combined 119,800 16,100
------------------------------------------------------------
1999
Asbestos $467,700 $91,800
Environmental 27,700 13,000
Combined 72,600 21,000
------------------------------------------------------------
1998
Asbestos $389,800 $72,400
Environmental 49,500 21,500
Combined 93,600 28,100
------------------------------------------------------------
A.M. Best, an insurance rating agency, has developed a survival ratio to
measure the number of years it would take a company to exhaust both its asbestos
and environmental reserves for losses and loss expenses based on that company's
current level of asbestos and environmental claims payments. This is a ratio
derived by taking the current ending losses and loss expense reserves and
dividing by the average annual payments for the prior three years. Therefore,
the ratio derived is a simplistic measure of an estimate of the number of years
it would be before the current ending losses and loss expense reserves would be
paid off using recent average payments. The higher the ratio, the more years the
reserves for losses and loss expenses cover these claims payments. These ratios
are computed based on the ending reserves for losses and loss expenses over the
respective claims settlements during the fiscal year. Such payments include
indemnity payments and legal and loss adjustment payments. It should be noted,
however, that this is an extremely simplistic approach to measuring asbestos and
environmental reserve levels. Many factors, such as aggressive settlement
procedures, mix of business and level of coverage provided, have significant
impact on the amount of asbestos and environmental losses and loss expense
reserves, ultimate payments thereof and the resultant ratio.
The developed survival ratios include both involuntary and voluntary
indemnity payments. Involuntary payments are primarily attributable to court
judgments, court orders, covered claims with no coverage defenses, state
mandated cleanup costs, claims where AIG's coverage defenses are minimal, and
settlements made less than six months before the first trial setting. Also, AIG
considers all legal and loss adjustment payments as involuntary.
AIG believes voluntary indemnity payments should be excluded from the
survival ratio. The special asbestos and environmental claims unit actively
manages AIG's asbestos and environmental claims and proactively pursues early
settlement of environmental claims for all known and unknown sites. As a result,
AIG reduces its exposure to future environmental loss contingencies.
AIG's survival ratios for involuntary asbestos and environmental claims,
separately and combined, were based upon a three year average payment. These
ratios for the years ended December 31, 2000, 1999 and 1998 were as follows:
------------------------------------------------------------
GROSS NET
------------------------------------------------------------
2000
Involuntary survival ratios:
Asbestos 3.6 6.8
Environmental 20.0 16.9
Combined 7.6 11.5
------------------------------------------------------------
1999
Involuntary survival ratios:
Asbestos 4.1 6.3
Environmental 17.3 17.5
Combined 8.2 11.7
------------------------------------------------------------
1998
Involuntary survival ratios:
Asbestos 3.7 5.2
Environmental 17.0 17.2
Combined 7.8 10.8
------------------------------------------------------------
AIG's operations are negatively impacted under guarantee fund assessment
laws which exist in most states. As a result of operating in a state which has
guarantee fund assessment laws, a solvent insurance company may be assessed for
certain obligations arising from the insolvencies of other insurance companies
which operated in that state. AIG generally records these assessments upon
notice. Additionally, certain states permit at least a portion of the assessed
amount to be used as a credit against a company's future premium tax
liabilities. Therefore, the ultimate net assessment cannot reasonably be
estimated. The guarantee fund assessments net of credits for 2000, 1999 and 1998
were $15 million, $15 million and $16 million, respectively.
AIG is also required to participate in various involuntary pools
(principally workers' compensation business) which provide insurance coverage
for those not able to obtain such coverage in the voluntary markets. This
participation is also recorded upon notification, as these amounts cannot
reasonably be estimated.
LIFE INSURANCE OPERATIONS
AIG's life insurance subsidiaries offer a wide range of traditional insurance
and financial and investment products. Traditional products consist of
individual and group life, annuity, endowment and accident and health policies.
Financial and investment products consist of single premium annuity, variable
annuities, guaranteed investment contracts, universal life and pensions.
AIG's three principal overseas life operations are American Life Insurance
Company (ALICO), American International Assurance Company, Limited together with
American International Assurance Company (Bermuda) Limited (AIA) and Nan Shan
Life Insurance Company, Ltd. (Nan Shan). ALICO is incorporated in Delaware and
all of its business is written outside of the United
8
10
--------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
States. ALICO has operations either directly or through subsidiaries in
approximately 50 countries located in Europe, Africa, Latin America, the
Caribbean, the Middle East, and the Far East, with Japan being the largest
territory. AIA operates primarily in Hong Kong, Singapore, Malaysia and
Thailand. Nan Shan operates in Taiwan. For all periods through December 31,
2000, AIG's domestic life operations were comprised of three separate
operations, the life insurance subsidiaries of AGC, AIG's domestic life
companies and the life insurance subsidiaries of SunAmerica Inc. (SunAmerica), a
Delaware corporation which owns substantially all of the subsidiaries which were
owned by SunAmerica Inc., the Maryland corporation which was merged into AIG in
January 1999. The domestic life subsidiaries of AIG and SunAmerica sell
primarily financial and investment type products, while AGC's subsidiaries sell
these as well as traditional life products. (See also Note 18 of Notes to
Financial Statements.)
Life insurance operations for the twelve month periods ending December 31,
2000, 1999 and 1998 were as follows:
(IN MILLIONS)
-------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------
Premium income:
Domestic $ 4,818 $ 4,485 $ 4,216
Foreign 12,355 10,995 9,509
-------------------------------------------------------------
Total $ 17,173 $ 15,480 $ 13,725
-------------------------------------------------------------
Net investment income:
Domestic $ 7,467 $ 6,796 $ 6,045
Foreign 3,197 2,709 2,312
-------------------------------------------------------------
Total $ 10,664 $ 9,505 $ 8,357
-------------------------------------------------------------
Operating income before
realized capital losses:
Domestic $ 2,746 $ 2,414 $ 2,005
Foreign 2,238 1,944 1,665
-------------------------------------------------------------
Total 4,984 4,358 3,670
Realized capital losses (162) (148) (74)
-------------------------------------------------------------
Operating income $ 4,822 $ 4,210 $ 3,596
-------------------------------------------------------------
Life insurance in-force:
Domestic $477,576 $469,023 $407,101
Foreign 494,316 481,910 437,944
-------------------------------------------------------------
Total $971,892 $950,933 $845,045
-------------------------------------------------------------
AIG's life premium income in 2000 represented a 10.9 percent increase from
the prior year. This compares with an increase of 12.8 percent in 1999 over
1998. Foreign life operations produced 71.9 percent, 71.0 percent and 69.3
percent of the life premium income in 2000, 1999 and 1998, respectively. (See
also Notes 1, 4 and 6 of Notes to Financial Statements.)
The traditional life products, particularly individual life products, were
major contributors to the growth in foreign premium income. These traditional
life products, coupled with the increased distribution of financial and
investment products contributed to the growth in foreign investment income. A
mixture of traditional, accident and health and financial products are being
sold in Japan through ALICO.
Differences in foreign exchange rates during 2000 relative to 1999 had a
negligible effect on foreign life premium income when translated from original
currencies into U.S. dollars.
Life insurance net investment income increased 12.2 percent in 2000
compared to an increase of 13.7 percent in 1999. The growth in net investment
income in 2000 and 1999 was attributable to both foreign and domestic new cash
flow for investment. The new cash flow was generated from life insurance
operations and included the compounding of previously earned and reinvested net
investment income. (See also the discussion under "Liquidity" herein.)
Life insurance realized capital losses were $162 million in 2000, $148
million in 1999 and $74 million in 1998. These realized capital losses resulted
from the ongoing management of the life insurance investment portfolios within
the overall objectives of the life insurance operations and arose primarily from
the disposition of equity securities and available for sale fixed maturities as
well as redemptions of fixed maturities. The increase in realized capital losses
from 1998 to 2000 reflects the impact of higher interest rates, wider spreads
between governmental and non-governmental obligations and weaker Asian markets
on the customary trading activities of the life insurance investment operations.
Life insurance operating income in 2000 increased 14.5 percent to $4.82
billion compared to an increase of 17.1 percent in 1999. Excluding realized
capital gains and losses from life insurance operating income, the percent
increases would be 14.4 percent and 18.7 percent in 2000 and 1999, respectively.
The contribution of life insurance operating income to income before income
taxes and minority interest amounted to 48.1 percent in 2000 compared to 44.8
percent in 1999 and 47.4 percent in 1998.
The risks associated with the traditional life and accident and health
products are underwriting risk and investment risk. The risk associated with the
financial and investment contract products is investment risk.
Underwriting risk represents the exposure to loss resulting from the actual
policy experience adversely emerging in comparison to the assumptions made in
the product pricing associated with mortality, morbidity, termination and
expenses. AIG's foreign life companies limit their maximum underwriting exposure
on traditional life insurance of a single life to approximately one million
dollars of coverage and AIG's domestic life companies, including those of AGC,
limit their maximum underwriting exposure on traditional life insurance of a
single life to $2.5 million of coverage by using yearly renewable term
reinsurance. (See also Note 5 of Notes to Financial Statements.)
The investment risk represents the exposure to loss resulting from the cash
flows from the invested assets, primarily long-term fixed rate investments,
being less than the cash flows required to
9
11
--------------------------------------------------------------------------------
meet the obligations of the expected policy and contract liabilities and the
necessary return on investments.
To minimize its exposure to investment risk, AIG tests the cash flows from
the invested assets and the policy and contract liabilities using various
interest rate scenarios to assess whether there is a liquidity excess or
deficit. If a rebalancing of the invested assets to the policy and contract
claims became necessary and did not occur, a demand could be placed upon
liquidity. (See also the discussion under "Liquidity" herein.)
The asset-liability relationship is appropriately managed in AIG's foreign
operations, as it has been throughout AIG's history, even though certain
territories lack qualified long-term investments or there are investment
restrictions imposed by the local regulatory authorities. For example, in Japan
and several Southeast Asia territories, the duration of the investments is often
for a shorter period than the effective maturity of the related policy
liabilities. Therefore, there is a risk that the reinvestment of the proceeds at
the maturity of the initial investments may be at a yield below that of the
interest required for the accretion of the policy liabilities. At December 31,
2000, the average duration of the investment portfolio in Japan was 6.0 years.
Additionally, there exists a future investment risk associated with certain
policies currently in force which will have premium receipts in the future. That
is, the investment of these future premium receipts may be at a yield below that
required to meet future policy liabilities. The anticipated average period for
the receipt and investment of these future premium receipts is 6.1 years. These
durations compare with an estimated average duration of 10.4 years for the
corresponding policy liabilities. To maintain an adequate yield to match the
interest necessary to support future policy liabilities, constant management
focus is required to reinvest the proceeds of the maturing securities and to
invest the future premium receipts without sacrificing investment quality. To
the extent permitted under local regulation, AIG may invest in qualified
longer-term securities outside Japan to achieve a closer matching in both
duration and the required yield. AIG is able to manage any asset-liability
duration difference through maintenance of sufficient global liquidity and to
support any operational shortfall through its international financial network.
(See also the discussion under "Liquidity" herein.)
The asset-liability relationship is appropriately managed in AIG's domestic
operations, as there is ample supply of qualified long-term investments.
AIG uses asset-liability matching as a management tool worldwide to
determine the composition of the invested assets and marketing strategies. As a
part of these strategies, AIG may determine that it is economically advantageous
to be temporarily in an unmatched position due to anticipated interest rate or
other economic changes.
FINANCIAL SERVICES OPERATIONS
AIG's financial services subsidiaries engage in diversified financial products
and services including premium financing, banking services and consumer finance
services.
International Lease Finance Corporation (ILFC) engages primarily in the
acquisition of new and used commercial jet aircraft and the leasing and
remarketing of such aircraft to airlines around the world. Also, ILFC provides,
for a fee, fleet management services to certain third-party operators. (See also
Note 18 of Notes to Financial Statements.)
AIG Financial Products Corp. and its subsidiaries (AIGFP) structure
financial transactions, including long-dated interest rate and currency swaps
and structured borrowings through notes, bonds and guaranteed investment
agreements. (See also Note 18 of Notes to Financial Statements.)
American General Finance, Inc. and its subsidiaries (AGF) provide a wide
variety of consumer finance products, including mortgages, consumer loans,
retail sales finance and credit related insurance to customers in the United
States. (See also Note 18 of Notes to Financial Statements.)
AIG Trading Group Inc. and its subsidiaries (AIGTG) engage in various
commodities trading, foreign exchange trading, interest rate swaps and market
making activities. (See also Note 18 of Notes to Financial Statements.)
Financial services operations for the twelve month periods ending December
31, 2000, 1999 and 1998 were as follows:
(IN MILLIONS)
-------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------
REVENUES:
International Lease Finance
Corporation $2,441 $2,194 $2,002
AIG Financial Products Corp.* 1,056 737 550
American General Finance, Inc. 1,902 1,729 1,609
AIG Trading Group Inc.* 254 227 374
Other 301 182 118
-------------------------------------------------------------
Total $5,954 $5,069 $4,653
-------------------------------------------------------------
OPERATING INCOME:
International Lease Finance
Corporation $ 654 $ 590 $ 496
AIG Financial Products Corp. 648 482 323
American General Finance, Inc. 385 351 312
AIG Trading Group Inc. 62 109 123
Other, including intercompany
adjustments (71) (100) (73)
-------------------------------------------------------------
Total $1,678 $1,432 $1,181
-------------------------------------------------------------
* Represents commissions, transaction and other fees.
Financial services operating income increased 17.2 percent in 2000 over
1999. This compares with an increase of 21.3 percent in 1999 over 1998.
10
12
--------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
Financial services operating income represented 16.7 percent of AIG's
income before income taxes and minority interest in 2000. This compares to 15.2
percent and 15.6 percent in 1999 and 1998, respectively.
ILFC generates its revenues primarily from leasing new and used commercial
jet aircraft to domestic and foreign airlines. Revenues also result from the
remarketing of commercial jets for its own account, for airlines and for
financial institutions. Revenues in 2000 increased 11.3 percent from 1999
compared to a 9.6 percent increase during 1999 from 1998. The revenue growth in
each year resulted primarily from the increase in flight equipment available for
operating lease, the increase in the relative cost of the leased fleet and the
increase in the relative composition of the fleet with wide bodies which
typically receive higher lease payments. Approximately 20 percent of ILFC's
operating lease revenues are derived from U.S. and Canadian airlines. During
2000, operating income increased 10.8 percent from 1999 and 19.0 percent during
1999 from 1998. ILFC finances its purchases of aircraft primarily through the
issuance of a variety of debt instruments. The composite borrowing rates at
December 31, 2000, 1999 and 1998 were 6.37 percent, 6.14 percent and 6.03
percent, respectively. (See also the discussions under "Capital Resources" and
"Liquidity" herein and Note 18 of Notes to Financial Statements.)
ILFC is exposed to loss through non-performance of aircraft lessees,
through owning aircraft which it would be unable to sell or re-lease at
acceptable rates at lease expiration and through committing to purchase aircraft
which it would be unable to lease. ILFC manages its lessee non-performance
exposure through credit reviews and security deposit requirements. At December
31, 2000, there were 380 aircraft subject to operating leases and there were
three aircraft off lease. Two of the off lease aircraft were re-leased in early
2001. (See also the discussions under "Capital Resources" and "Liquidity"
herein.)
AIGFP participates in the derivatives dealer market conducting, primarily
as principal, an interest rate, currency, equity and credit derivative products
business. AIGFP also enters into structured transactions including long-dated
forward foreign exchange contracts, option transactions, liquidity facilities
and investment agreements and invests in a diversified portfolio of securities.
AIGFP derives substantially all its revenues from proprietary positions entered
in connection with counterparty transactions rather than from speculative
transactions. Revenues in 2000 increased 43.3 percent from 1999 compared to a
33.9 percent increase during 1999 from 1998. During 2000, operating income
increased 34.5 percent from 1999 and increased 49.4 percent during 1999 from
1998. As AIGFP is a transaction-oriented operation, current and past revenues
and operating results may not provide a basis for predicting future performance.
(See also the discussions under "Capital Resources," "Liquidity" and
"Derivatives" herein and Note 18 of Notes to Financial Statements.)
AGF derives a substantial portion of its revenues from finance charges
assessed on outstanding mortgages and finance receivables. Revenues in 2000
increased 10.0 percent from 1999 compared to a 7.5 percent increase during 1999
from 1998. The growth in revenues during 2000 was generally due to the growth in
the average finance receivables. During 2000, operating income increased 9.7
percent from 1999 and 12.5 percent during 1999 from 1998. The increase in
operating income resulted from the growth in finance charges and improved credit
quality of the receivables portfolio, partially offset by higher borrowing costs
and lower yields on finance receivables in 2000.
AGF is exposed to loss when contractual payments are not received. AGF
manages its collection exposure through the mix of types of loans and security
thereon. (See also Notes 8 and 9 of Notes to Financial Statements.)
AIGTG derives a substantial portion of its revenues from market making and
trading activities, as principals, in foreign exchange, interest rates and
precious and base metals. Revenues in 2000 increased 11.6 percent from 1999
compared to a 39.2 percent decrease during 1999 from 1998. During 2000,
operating income decreased 43.2 percent from 1999 compared to a 11.4 percent
decrease during 1999 from 1998. As AIGTG is a transaction-oriented operation,
current and past revenues and operating results may not provide a basis for
predicting future performance or for comparing revenues to operating income.
(See also the discussions under "Capital Resources," "Liquidity" and
"Derivatives" herein and Note 18 of Notes to Financial Statements.)
AIG Consumer Finance Group, Inc., through its subsidiaries, is engaged in
developing a multi-product consumer finance business with an emphasis on
emerging markets.
ASSET MANAGEMENT OPERATIONS
AIG's asset management operations offer a wide variety of investment vehicles
and services, including variable annuities, mutual funds, and investment asset
management. Such products and services are offered to individuals and
institutions both domestically and internationally.
AIG's principal asset management operations are SunAmerica's asset
management operations (SAAMCo), AIG Global Investment Group, Inc. and its
subsidiaries (Global Investment), AIG Capital Partners, Inc. (Cap Partners) and
AGC's asset management operations through The Variable Annuity Life Insurance
Company (VALIC). SAAMCo develops and sells variable annuities and other
investment products, sells and manages mutual funds and provides financial
services. Global Investment manages third-party institutional, retail and
private equity funds invested assets on a global basis, and provides custodial
services. Cap Partners organizes, and manages the invested assets of
institutional investment funds and may also invest in such funds. VALIC provides
tax qualified annuities to the employees of educational, healthcare and
governmental entities. Each of these subsidiary operations receives fees for
investment products and services provided.
11
13
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Asset management operations for the twelve month periods ending December
31, 2000, 1999 and 1998 were as follows:
(IN MILLIONS)
-------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------
REVENUES:
AGC $2,258 $2,127 $2,013
SunAmerica 754 602 419
Other 463 383 288
-------------------------------------------------------------
Total $3,475 $3,112 $2,720
-------------------------------------------------------------
OPERATING INCOME:
AGC $ 731 $ 606 $ 497
SunAmerica 331 233 140
Other 99 81 51
-------------------------------------------------------------
Total $1,161 $ 920 $ 688
-------------------------------------------------------------
The increases in revenues in 2000 and 1999 were primarily attributable to
increased fees from the management of the variable annuity business and mutual
fund assets by SAAMCo and VALIC.
Asset management operating income increased 26.2 percent in 2000 over 1999.
This compares with an increase of 33.7 percent in 1999 over 1998.
Asset management operating income represented 11.6 percent of AIG's income
before income taxes and minority interest in 2000. This compares to 9.8 percent
and 9.1 percent in 1999 and 1998, respectively.
At December 31, 2000, AIG's third party assets under management, including
both retail mutual funds and institutional accounts, approximated $41 billion.
OTHER OPERATIONS
In 1998, AIG's equity in income of minority-owned insurance operations was $40
million and represented 0.5 percent of income before income taxes and minority
interest. In 2000 and 1999, AIG did not report equity in income of
minority-owned insurance operations as a result of the consolidation of the
operations of Transatlantic and SELIC Holdings, Ltd. into general insurance
operating results. IPC Holdings, Ltd., the remaining operation included in
equity in income of minority-owned insurance operations in previous periods is
now reported as a component of other income (deductions) -- net.
Other realized capital losses amounted to $190 million, $44 million and $1
million in 2000, 1999 and 1998, respectively.
Other income (deductions)-net includes AIG's equity in certain minor
majority-owned subsidiaries and certain partially-owned companies, realized
foreign exchange transaction gains and losses in substantially all currencies
and unrealized gains and losses in hyperinflationary currencies, as well as the
income and expenses of the parent holding company and other miscellaneous income
and expenses. In 2000, net deductions amounted to $972 million. In 1999 and
1998, net deductions amounted to $600 million and $849 million, respectively.
(See also the discussion under "Recent Developments" herein.)
Income before income taxes and minority interest amounted to $10.02 billion
in 2000, $9.40 billion in 1999 and $7.58 billion in 1998.
In 2000, AIG recorded a provision for income taxes of $2.97 billion
compared to the provisions of $2.83 billion and $2.19 billion in 1999 and 1998,
respectively. These provisions represent effective tax rates of 29.6 percent in
2000, 30.1 percent in 1999 and 28.9 percent in 1998. (See Note 3 of Notes to
Financial Statements.)
Minority interest represents minority shareholders' equity in income of
certain majority-owned consolidated subsidiaries. Minority interest amounted to
$413 million, $380 million and $347 million in 2000, 1999 and 1998,
respectively.
Net income amounted to $6.64 billion in 2000, $6.19 billion in 1999 and
$5.05 billion in 1998. The increases in net income over the three year period
resulted from those factors described above.
CAPITAL RESOURCES
At December 31, 2000, AIG had total capital funds of $47.44 billion and total
borrowings of $54.32 billion. At that date, $50.39 billion of such borrowings
were either not guaranteed by AIG or were matched borrowings under obligations
of guaranteed investment agreements (GIAs) or matched notes and bonds payable.
Total borrowings and borrowings not guaranteed or matched at December 31,
2000 and 1999 were as follows:
(IN MILLIONS)
------------------------------------------------------------
DECEMBER 31, 2000 1999
------------------------------------------------------------
GIAs -- AIGFP $13,595 $ 9,430
------------------------------------------------------------
Commercial Paper:
AGC(a) 1,921 1,932
AGF(a) 5,162 4,489
AIG Funding, Inc. (Funding) 968 888
ILFC(a) 4,259 2,958
A.I. Credit Corp. 597 475
AIG Finance (Taiwan) Limited(a) 104 83
AIG Credit Card Company (Taiwan)(a) 36 --
------------------------------------------------------------
Total $13,047 $10,825
------------------------------------------------------------
12
14
--------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
(IN MILLIONS)
------------------------------------------------------------
DECEMBER 31, 2000 1999
------------------------------------------------------------
Medium Term Notes:
AGF(a) $ 3,069 $ 2,213
ILFC(a) 3,175 3,226
AIG 582 481
------------------------------------------------------------
Total 6,826 5,920
------------------------------------------------------------
Notes and Bonds Payable:
ILFC(a)(b) 5,529 5,016
AIGFP 8,755 7,895
AIG 720 705
AGC(a) 1,338 1,188
AGF(a) 2,602 3,504
------------------------------------------------------------
Total 18,944 18,308
------------------------------------------------------------
Loans and Mortgages Payable:
ILFC(a)(c) 463 670
AIG Finance (Hong Kong) Limited(a) 346 566
AIG Consumer Finance Group, Inc.(a) 662 334
AIG 440 257
------------------------------------------------------------
Total 1,911 1,827
------------------------------------------------------------
Total Borrowings 54,323 46,310
------------------------------------------------------------
Borrowings not guaranteed by AIG 28,666 26,179
Matched GIA borrowings 13,595 9,430
Matched notes and bonds payable -- AIGFP 8,127 7,370
------------------------------------------------------------
50,388 42,979
------------------------------------------------------------
Remaining borrowings of AIG $ 3,935 $ 3,331
------------------------------------------------------------
(a) AIG does not guarantee or support these borrowings.
(b) Includes borrowings under Export Credit Facility of $2.07 billion.
(c) Capital lease obligations.
See also Note 9 of Notes to Financial Statements.
During 2000, AIGFP increased the aggregate principal amount outstanding of
its notes and bonds payable to $8.76 billion. AIGFP uses the proceeds from the
issuance of notes and bonds and GIA borrowings to invest in a diversified
portfolio of securities and derivative transactions. The funds may also be
temporarily invested in securities purchased under agreements to resell. (See
also the discussions under "Operational Review", "Liquidity" and "Derivatives"
herein and Notes 1, 8, 9, 12 and 18 of Notes to Financial Statements.)
AIG Funding, Inc. (Funding), through the issuance of commercial paper,
fulfills the short-term cash requirements of AIG and its non-insurance
subsidiaries. Funding intends to continue to meet AIG's funding requirements
through the issuance of commercial paper guaranteed by AIG. This issuance of
Funding's commercial paper is subject to the approval of AIG's Board of
Directors. ILFC and A.I. Credit Corp. (AICCO) as well as AIG Credit Card Company
(Taiwan) -- (AIGCCC-Taiwan) and AIG Finance (Taiwan) Limited -- (AIGF-Taiwan),
both consumer finance subsidiaries in Taiwan, AGC and AGF have issued commercial
paper for the funding of their own operations. At December 31, 2000, AIG did not
guarantee or support the commercial paper of any of its subsidiaries other than
Funding and AICCO. In early 2001, AICCO ceased issuing commercial paper under
its program and the agreement which AIG had provided supporting the commercial
paper was terminated; AICCO's funding requirements are now met through Funding's
program. (See also the discussion under "Derivatives" herein and Note 9 of Notes
to Financial Statements.)
AIG and Funding have entered into syndicated revolving credit facilities
(collectively, the Facility) aggregating $1.5 billion. The Facility consists of
$1.0 billion in short-term revolving credit facility and a $500 million five
year revolving credit facility. The Facility can be used for general corporate
purposes and also to provide backup for AIG's commercial paper programs
administered by Funding. There are currently no borrowings outstanding under the
Facility, nor were any borrowings outstanding as of December 31, 2000.
AGC and AGF shared in a $6.2 billion unsecured bank credit facility to
support their commercial paper borrowings. There were no borrowings under this
facility as of December 31, 2000. AGC had $400 million in aggregate principal
amount of debt securities registered and available for issuance as of December
31, 2000. AGF had $1.6 billion in aggregate principal amount of debt securities
registered and available for issuance at December 31, 2000. AGC uses the
proceeds from the issuance of notes and bonds for general corporate purposes.
AGF uses the proceeds from the issuance of notes and bonds for the funding of
its finance receivables.
At December 31, 2000, ILFC had increased the aggregate principal amount
outstanding of its medium term and term notes to $8.70 billion, a net increase
of $462 million, and recorded a net decline in its capital lease obligations of
$207 million and a net increase in its commercial paper of $1.30 billion. At
December 31, 2000, ILFC had $75 million in aggregate principal amount of debt
securities registered for issuance from time to time, which debt had been sold
as of March 16, 2001. An additional $2.0 billion principal amount of debt
securities was registered as of January 5, 2001, under which $800 million in
notes were sold as of March 16, 2001. A $750 million Medium Term Note program
was implemented on January 19, 2001 under which $200 million has been sold as of
March 16, 2001. In addition, ILFC established a Euro Medium Term Note Program
for $2.0 billion, under which $771 million in notes were sold through December
31, 2000.
ILFC has an Export Credit Facility up to a maximum of $4.3 billion, for
approximately 75 aircraft to be delivered through 2001. ILFC has the right, but
is not required, to use the facility to fund 85 percent of each aircraft's
purchase price. This facility is guaranteed by various European Export Credit
Agencies. The interest rate varies from 5.75 percent to 5.90 percent on the
first 75 aircraft depending on the delivery date of the aircraft. Through March
9, 2001, ILFC borrowed $2.2 billion under this facility.
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Borrowings with respect to this facility are included in Notes and Bonds Payable
in the accompanying table of borrowings.
The proceeds of ILFC's debt financing are primarily used to purchase flight
equipment, including progress payments during the construction phase. The
primary sources for the repayment of this debt and the interest expense thereon
are the cash flow from operations, proceeds from the sale of flight equipment
and the rollover and refinancing of the prior debt. (See also the discussions
under "Operational Review" and "Liquidity" herein.)
During 2000, AIG issued $233 million principal amount of Medium Term Notes
and $132 million of previously issued notes matured or were called. At December
31, 2000, AIG had $781 million in aggregate principal amount of debt securities
registered for issuance from time to time. In early 2001, AIG established a new
Medium Term Note program under which these securities may be issued.
AIG's capital funds increased $7.80 billion during 2000. Unrealized
appreciation of investments, net of taxes increased $1.15 billion. During 2000,
the cumulative translation adjustment loss, net of taxes, increased $210
million. Thus, accumulated comprehensive income increased $941 million. The
change from year to year with respect to the unrealized appreciation of
investments, net of taxes was primarily impacted by the decline in domestic
interest rates. The cumulative translation adjustment loss, net of taxes was
primarily impacted by the general strength in the U.S. dollar relative to
certain currencies in Southeast Asia and South America. (See also the discussion
under "Operational Review" and "Liquidity" herein.) Retained earnings increased
$3.83 billion, resulting from net income less dividends, including stock
dividends of $2.04 billion.
During 2000, AIG repurchased in the open market 10,351,600 shares of its
common stock. Through March 22, 2001, AIG repurchased in the open market
2,525,000 shares of its common stock. AIG intends to continue to buy its common
shares in the open market for general corporate purposes, including to satisfy
its obligations under various employee benefit plans.
Payments of dividends to AIG by its insurance subsidiaries are subject to
certain restrictions imposed by statutory authorities. AIG has in the past
reinvested most of its unrestricted earnings in its operations and believes such
continued reinvestment in the future will be adequate to meet any foreseeable
capital needs. However, AIG may choose from time to time to raise additional
funds through the issuance of additional securities. At December 31, 2000, there
were no significant statutory or regulatory issues which would impair AIG's
financial condition, results of operations or liquidity. To AIG's knowledge, no
AIG company is on any regulatory or similar "watch list". (See also the
discussion under "Liquidity" herein and Note 11 of Notes to Financial
Statements.)
AIG's insurance subsidiaries, in common with other insurers, are subject to
regulation and supervision by the states and jurisdictions in which they do
business. The National Association of Insurance Commissioners (NAIC) has
developed Risk-Based Capital (RBC) requirements. RBC relates an individual
insurance company's statutory surplus to the risk inherent in its overall
operations. At December 31, 2000, the adjusted capital of each of AIG's domestic
general companies and of each of AIG's domestic life companies exceeded each of
their RBC standards by considerable margins.
A substantial portion of AIG's general insurance business and a majority of
its life insurance business are conducted in foreign countries. The degree of
regulation and supervision in foreign jurisdictions varies from minimal in some
to stringent in others. Generally, AIG, as well as the underwriting companies
operating in such jurisdictions, must satisfy local regulatory requirements.
Licenses issued by foreign authorities to AIG subsidiaries are subject to
modification and revocation. Thus, AIG's insurance subsidiaries could be
prevented from conducting future business in certain of the jurisdictions where
they currently operate. AIG's international operations include operations in
various developing nations. Both current and future foreign operations could be
adversely affected by unfavorable political developments up to and including
nationalization of AIG's operations without compensation. Adverse effects
resulting from any one country may impact AIG's results of operations, liquidity
and financial condition depending on the magnitude of the event and AIG's net
financial exposure at that time in that country.
LIQUIDITY
AIG's liquidity is primarily derived from the operating cash flows of its
general and life insurance operations.
At December 31, 2000, AIG's consolidated invested assets included $7.02
billion of cash and short-term investments. Consolidated net cash provided from
operating activities in 2000 amounted to $8.45 billion.
Sources of funds considered in meeting the objectives of AIG's financial
services operations include guaranteed investment agreements, issuance of long
and short-term debt, maturities and sales of securities available for sale,
securities sold under repurchase agreements, trading liabilities, securities and
spot commodities sold but not yet purchased, issuance of equity, and cash
provided from such operations. AIG's strong capital position is integral to
managing this liquidity, as it enables AIG to raise funds in diverse markets
worldwide. (See also the discussions under "Capital Resources" herein.)
Management believes that AIG's liquid assets, its net cash provided by
operations, and access to the capital markets will enable it to meet any
foreseeable cash requirements.
The liquidity of the combined insurance operations is derived both
domestically and abroad. The combined insurance operating cash flow is derived
from two sources, underwriting operations and investment operations. In the
aggregate, AIG's insurance operations generated approximately $18.3 billion in
pre-tax cash flow during 2000. Cash flow includes periodic premium collections,
including policyholders' contract deposits, paid loss recoveries less
reinsurance
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American International Group, Inc. and Subsidiaries
premiums, losses, benefits, acquisition and operating expenses. Generally, there
is a time lag from when premiums are collected and, when as a result of the
occurrence of events specified in the policy, the losses and benefits are paid.
AIG's insurance investment operations generated approximately $12.9 billion in
investment income cash flow during 2000. Investment income cash flow is
primarily derived from interest and dividends received and includes realized
capital gains net of realized capital losses.
In addition to the combined insurance pre-tax operating cash flow, AIG's
insurance operations held $6.29 billion in cash and short-term investments at
December 31, 2000. The aforementioned operating cash flow and the cash and
short-term balances held provided AIG's insurance operations with a significant
amount of liquidity.
This liquidity is available, among other things, to purchase high quality
and diversified fixed income securities and to a lesser extent marketable equity
securities and to provide mortgage loans on real estate, policy loans and
collateral loans. This cash flow coupled with proceeds of approximately $51
billion from the maturities, sales and redemptions of fixed income securities
and from the sale of equity securities was used to purchase approximately $64
billion of fixed income securities and marketable equity securities during 2000.
The following table is a summary of AIG's invested assets by significant
segment, including investment income due and accrued of $3.52 billion and $3.13
billion and real estate of $2.08 billion and $1.84 billion, at December 31, 2000
and 1999, respectively:
(DOLLARS IN MILLIONS)
-------------------------------------------------------------
INVESTED PERCENT
ASSETS OF TOTAL
-------------------------------------------------------------
2000
General insurance $ 42,892 14.1%
Life insurance 171,019 56.2
Financial services and asset management 89,479 29.4
Other 831 0.3
-------------------------------------------------------------
Total $304,221 100.0%
-------------------------------------------------------------
1999
General insurance $ 39,135 14.5%
Life insurance 155,844 57.7
Financial services and asset management 74,398 27.6
Other 651 0.2
-------------------------------------------------------------
Total $270,028 100.0%
-------------------------------------------------------------
INSURANCE INVESTED ASSETS
The following tables summarize the composition of AIG's insurance invested
assets by insurance segment, including investment income due and accrued and
real estate, at December 31, 2000 and 1999:
(DOLLARS IN MILLIONS)
--------------------------------------------------------------------------------------------------------------------------------
PERCENT DISTRIBUTION
GENERAL LIFE PERCENT ---------------------
DECEMBER 31, 2000 INSURANCE INSURANCE TOTAL OF TOTAL DOMESTIC FOREIGN
--------------------------------------------------------------------------------------------------------------------------------
Fixed maturities:
Available for sale, at market value(a) $18,168 $135,212 $153,380 71.7% 71.6% 28.4%
Held to maturity, at amortized cost 11,533 -- 11,533 5.4 100.0 --
Equity securities, at market value(b) 4,666 3,112 7,778 3.6 60.0 40.0
Mortgage loans on real estate, policy and collateral
loans 65 16,860 16,925 7.9 74.0 26.0
Short-term investments, including time deposits, and
cash 1,448 4,839 6,287 2.9 51.6 48.4
Real estate 408 1,565 1,973 0.9 25.3 74.7
Investment income due and accrued 584 2,773 3,357 1.6 64.0 36.0
Other invested assets 6,020 6,658 12,678 6.0 88.4 11.6
--------------------------------------------------------------------------------------------------------------------------------
Total $42,892 $171,019 $213,911 100.0% 72.8% 27.2%
--------------------------------------------------------------------------------------------------------------------------------
(a) Includes $846 million of bonds trading securities, at market value.
(b) Includes $1.19 billion of non-redeemable preferred stocks, at market value.
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(DOLLARS IN MILLIONS)
--------------------------------------------------------------------------------------------------------------------------------
PERCENT DISTRIBUTION
GENERAL LIFE PERCENT ---------------------
DECEMBER 31, 1999 INSURANCE INSURANCE TOTAL OF TOTAL DOMESTIC FOREIGN
--------------------------------------------------------------------------------------------------------------------------------
Fixed maturities:
Available for sale, at market value(a) $16,903 $120,681 $137,584 70.6% 73.7% 26.3%
Held to maturity, at amortized cost 12,078 -- 12,078 6.2 100.0 --
Equity securities, at market value(b) 4,000 3,154 7,154 3.7 54.7 45.3
Mortgage loans on real estate, policy and collateral
loans 70 16,424 16,494 8.4 72.6 27.4
Short-term investments, including time deposits, and
cash 977 6,533 7,510 3.9 51.1 48.9
Real estate 381 1,356 1,737 0.9 28.6 71.4
Investment income due and accrued 576 2,481 3,057 1.5 66.0 34.0
Other invested assets 4,150 5,215 9,365 4.8 85.2 14.8
--------------------------------------------------------------------------------------------------------------------------------
Total $39,135 $155,844 $194,979 100.0% 73.7% 26.3%
--------------------------------------------------------------------------------------------------------------------------------
(a) Includes $1.04 billion of bonds trading securities, at market value.
(b) Includes $805 million of non-redeemable preferred stocks, at market value.
Generally, insurance regulations restrict the types of assets in which an
insurance company may invest.
With respect to fixed maturities, AIG's general strategy is to invest in
high quality securities while maintaining diversification to avoid significant
exposure to issuer, industry and/or country concentrations. With respect to
general insurance, AIG's strategy is to invest in longer duration fixed
maturities to maximize the yields at the date of purchase. With respect to life
insurance, AIG's strategy is to produce cash flows required to meet maturing
insurance liabilities (See also the discussion under "Operational Review: Life
Insurance Operations" herein.)
The fixed maturity available for sale portfolio is subject to decline in
fair value as interest rates rise. Such declines in fair value are presented as
a component of comprehensive income in unrealized appreciation of investments,
net of taxes.
The fixed maturities held to maturity portfolio is exposed to adverse
interest rate fluctuations. However, AIG has the ability and intent to hold such
securities to maturity. Therefore, there would be no detrimental impact to AIG's
results of operations or financial condition as a result of such fluctuations.
At December 31, 2000, approximately 74 percent of the fixed maturities
investments were domestic securities. Approximately 31 percent of such domestic
securities were rated AAA. Approximately 9 percent were below investment grade
or not rated.
A significant portion of the foreign insurance fixed income portfolio is
rated by Moody's, Standard & Poor's (S&P) or similar foreign services. Similar
credit quality rating services are not available in all overseas locations. AIG
annually reviews the credit quality of the foreign portfolio nonrated fixed
income investments, including mortgages. At December 31, 2000, approximately 11
percent of the foreign fixed income investments were either rated AAA or, on the
basis of AIG's internal analysis, were equivalent from a credit standpoint to
securities so rated. Approximately 16 percent were below investment grade or not
rated at that date. A large portion of the foreign insurance fixed income
portfolio are sovereign fixed maturity securities supporting the policy
liabilities in the country of issuance.
At December 31, 2000, approximately 15 percent of the fixed maturities
portfolio was collateralized mortgage obligations (CMOs), including commercial
mortgage backed securities. Substantially all of the CMOs were investment grade
and approximately 37 percent of the CMOs were backed by various U.S. government
agencies. CMOs are exposed to interest rate risk as the duration and ultimate
realized yield would be affected by the accelerated prepayments of the
underlying mortgages.
Any fixed income security may be subject to downgrade for a variety of
reasons subsequent to any balance sheet date.
AIG invests in equities for various reasons, including diversifying its
overall exposure to interest rate risk. Equity securities are subject to
declines in fair value. Such declines in fair value are presented in unrealized
appreciation of investments, net of taxes as a component of comprehensive
income.
Mortgage loans on real estate, policy and collateral loans comprised 7.9
percent of AIG's insurance invested assets at December 31, 2000. AIG's insurance
operations' holdings of real estate mortgages amounted to $10.59 billion of
which 86.2 percent was domestic. At December 31, 2000, only a nominal amount
were in default. It is AIG's practice to maintain a maximum loan to value ratio
of 75 percent at loan origination. At December 31, 2000, AIG's insurance
holdings of collateral loans amounted to $868 million, all of which were
foreign. It is AIG's strategy to enter into mortgage and collateral loans as an
adjunct primarily to life insurance fixed maturity investments. AIG's policy
loans increased from $5.20 billion at December 31, 1999 to $5.47 billion at
December 31, 2000.
Short-term investments represent amounts invested in various internal and
external money market funds, time deposits and cash held.
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American International Group, Inc. and Subsidiaries
AIG's real estate investment properties are primarily occupied by AIG's
various operations. The current market value of these properties considerably
exceeds their carrying value.
Other invested assets were primarily comprised of both foreign and domestic
private placements, limited partnerships and outside managed funds.
When permitted by regulatory authorities and when deemed necessary to
protect insurance assets, including invested assets, from adverse movements in
foreign currency exchange rates, interest rates and equity prices, AIG and its
insurance subsidiaries may enter into derivative transactions as end users. To
date, such activities have not been significant. (See also the discussion under
"Derivatives" herein.)
In certain jurisdictions, significant regulatory and/or foreign
governmental barriers exist which may not permit the immediate free flow of
funds between insurance subsidiaries or from the insurance subsidiaries to AIG
parent. These barriers generally cause only minor delays in the outward
remittance of the funds.
AIG's insurance operations are exposed to market risk. Market risk is the
risk of loss of fair value resulting from adverse fluctuations in interest and
foreign currency exchange rates and equity prices.
Measuring potential losses in fair values has recently become the focus of
risk management efforts by many companies. Such measurements are performed
through the application of various statistical techniques. One such technique is
Value at Risk (VaR). VaR is a summary statistical measure that uses historical
interest and foreign currency exchange rates and equity prices and estimates the
volatility and correlation of each of these rates and prices to calculate the
maximum loss that could occur over a defined period of time given a certain
probability.
AIG believes that statistical models alone do not provide a reliable method
of monitoring and controlling market risk. While VaR models are relatively
sophisticated, the quantitative market risk information generated is limited by
the assumptions and parameters established in creating the related models.
Therefore, such models are tools and do not substitute for the experience or
judgment of senior management.
AIG has performed a VaR analysis to estimate the maximum potential loss of
fair value for each of AIG's insurance segments and for each market risk within
each insurance segment. In this analysis, financial instrument assets include
the domestic and foreign invested assets excluding real estate and investment
income due and accrued. Financial instrument liabilities include reserve for
losses and loss expenses, reserve for unearned premiums, future policy benefits
for life and accident and health insurance contracts and policyholders' funds.
Due to the nature of each insurance segment, AIG manages the general and
life insurance operations separately. As a result, AIG manages separately the
invested assets of each. Accordingly, the VaR analysis was separately performed
for the general and the life insurance operations.
AIG calculated the VaR with respect to the net fair value of each of AIG's
insurance segments as of December 31, 2000 and December 31, 1999. AIG has
refined its methodology for calculating VaR and the results of the calculations
presented herein were performed using historical simulation. Using historical
simulation over the delta-normal approach does not significantly change the
results of this disclosure. The historical simulation methodology entails
re-pricing all assets and liabilities under explicit changes in market rates
within a specific historical time period. In this case, the most recent three
years of historical market information for interest rates, foreign exchange
rates, and equity index prices were used to construct the historical scenarios.
For each scenario, each transaction was re-priced. Portfolio, business unit and
finally AIG-wide scenario values were then calculated by netting the values of
all the underlying assets and liabilities. The final VaR number represents the
maximum potential loss incurred by these scenarios with 95% confidence (i.e.,
only 5% of historical scenarios show losses greater than the VaR figure). A one
month holding period was assumed in computing the VaR figure. At December 31,
2000 and December 31, 1999 the VaR of AIG's insurance segments was approximately
$744 million and $863 million for general insurance, respectively, and $1.46
billion and $1.25 billion for life insurance, respectively. The average VaR for
2000 for each of AIG's insurance segments was approximately $811 million for
general insurance and $1.36 billion for life insurance. The high and low VaRs
for general insurance during 2000 were approximately $954 million and $737
million, respectively. The high and low VaRs for life insurance during 2000 were
approximately $1.46 billion and $1.25 billion, respectively.
The following table presents the VaR of each component of market risk for
each of AIG's insurance segments as of December 31, 2000 and December 31, 1999.
VaR with respect to combined operations cannot be derived by aggregating the
individual risk or segment amounts presented herein.
(IN MILLIONS)
------------------------------------------------------------
GENERAL LIFE
INSURANCE INSURANCE
------------ ----------------
2000 1999 2000 1999
------------------------------------------------------------
MARKET RISK:
Interest rate $454 $338 $1,422 $1,169
Currency 59 29 373 566
Equity 603 798 384 462
------------------------------------------------------------
The average, high and low VaRs for the interest rate component of market
risk for the year ended December 31, 2000 were approximately $419 million, $454
million and $338 million, respectively, for general insurance and approximately
$1.30 billion, $1.42 billion and $1.17 billion, respectively, for life
insurance. The average, high and low VaRs for the currency component were
approximately $49 million, $65 million and $29 million, respectively, for
general insurance and approximately $430 million,
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$566 million and $372 million, respectively, for life insurance; and the
average, high and low VaRs for the equity component were approximately $694
million, $828 million and $603 million, respectively, for general insurance and
approximately $423 million, $462 million and $384 million, respectively, for
life insurance.
FINANCIAL SERVICES AND ASSET MANAGEMENT INVESTED ASSETS
The following table is a summary of the composition of AIG's financial services
and asset management invested assets at December 31, 2000 and 1999. (See also
the discussions under "Operational Review: Financial Services Operations",
"Operational Review: Asset Management Operations", "Capital Resources" and
"Derivatives" herein.)
(DOLLARS IN MILLIONS)
----------------------------------------------------------------------------------------------------------
2000 1999
-------------------- --------------------
INVESTED PERCENT INVESTED PERCENT
ASSETS OF TOTAL ASSETS OF TOTAL
----------------------------------------------------------------------------------------------------------
Flight equipment primarily under operating leases, net of
accumulated depreciation $19,325 21.6% $17,334 23.3%
Finance receivables, net of allowance 11,378 12.7 10,634 14.3
Unrealized gain on interest rate and currency swaps, options
and forward transactions 10,235 11.5 7,931 10.7
Securities available for sale, at market value 14,669 16.4 12,954 17.4
Trading securities, at market value 7,347 8.2 4,391 5.9
Securities purchased under agreements to resell, at contract
value 14,979 16.7 10,897 14.6
Trading assets 7,045 7.9 5,793 7.8
Spot commodities, at market value 363 0.4 683 0.9
Other, including short-term investments 4,138 4.6 3,781 5.1
----------------------------------------------------------------------------------------------------------
Total $89,479 100.0% $74,398 100.0%
----------------------------------------------------------------------------------------------------------
As previously discussed, the cash used for the purchase of flight equipment
is derived primarily from the proceeds of ILFC's debt financings. The primary
sources for the repayment of this debt and the interest expense thereon are the
cash flow from operations, proceeds from the sale of flight equipment and the
rollover and refinancing of the prior debt. During 2000, ILFC acquired flight
equipment costing $3.43 billion.
At December 31, 2000, ILFC had committed to purchase 488 aircraft
deliverable from 2001 through 2009 at an estimated aggregate purchase price of
$27.3 billion and had options to purchase 51 aircraft deliverable from 2001
through 2008 at an estimated aggregate purchase price of $3.0 billion. As of
March 15, 2001, ILFC has entered into leases for all of the aircraft to be
delivered in 2001 and 96 of 421 aircraft to be delivered subsequent to 2001.
ILFC will be required to find customers for any aircraft presently on order and
any aircraft to be ordered, and it must arrange financing for portions of the
purchase price of such equipment. In a rising interest rate environment, ILFC
negotiates higher lease rates on any new contracts. ILFC has been successful to
date both in placing its new aircraft on lease or under sales contract and
obtaining adequate financing.
ILFC is exposed to market risk and the risk of loss of fair value resulting
from adverse fluctuations in interest rates. As of December 31, 2000 and
December 31, 1999, AIG statistically measured the aforementioned loss of fair
value through the application of a VaR model. In this analysis, the net fair
value of ILFC was determined using the financial instrument assets which
included the tax adjusted future flight equipment lease revenue and the
financial instrument liabilities which included the future servicing of the
current debt. The estimated impact of the current derivative positions was also
taken into account.
AIG calculated the VaR with respect to the net fair value of ILFC using the
historical simulation methodology, as previously described. As of December 31,
2000 and December 31, 1999, the VaR with respect to the aforementioned net fair
value of ILFC was approximately $11 million and $50 million, respectively.
AIGFP's derivative transactions are carried at market value or at estimated
fair value when market prices are not readily available. AIGFP reduces its
economic risk exposure through similarly valued offsetting transactions
including swaps, trading securities, options, forwards and futures. The
estimated fair values of these transactions represent assessments of the present
value of expected future cash flows. These transactions are exposed to liquidity
risk if AIGFP were to sell or close out the transactions prior to maturity. AIG
believes that the impact of any such limited liquidity would not be significant
to AIG's financial condition or its overall liquidity. (See also the discussion
under "Operational Review: Financial Services Operations" and "Derivatives"
herein.)
AIGFP uses the proceeds from the issuance of notes and bonds and GIA
borrowings to invest in a diversified portfolio of securities, including
securities available for sale, at market, and derivative transactions. The funds
may also be temporarily invested in securities purchased under agreements to
resell. The proceeds from the disposal of the aforementioned securities
available for sale and securities purchased under agreements to resell have been
used
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to fund the maturing GIAs or other AIGFP financings. (See also the discussion
under "Capital Resources" herein.)
Securities available for sale is mainly a portfolio of debt securities,
where the individual securities have varying degrees of credit risk. At December
31, 2000, the average credit rating of this portfolio was AA or the equivalent
thereto as determined through rating agencies or internal review. AIGFP has also
entered into credit derivative transactions to hedge its credit risk associated
with $182 million of these securities. There were no securities deemed below
investment grade at December 31, 2000. There have been no significant downgrades
through March 1, 2001. Securities purchased under agreements to resell are
treated as collateralized transactions. AIGFP takes possession of or obtains a
security interest in securities purchased under agreements to resell. AIGFP
further minimizes its credit risk by monitoring counterparty credit exposure
and, when AIGFP deems necessary, it requires additional collateral to be
deposited. Trading securities, at market value are marked to market daily and
are held to meet the short-term risk management objectives of AIGFP.
AIGTG conducts, as principal, market making and trading activities in
foreign exchange, interest rates and precious and base metals. AIGTG owns
inventories in the commodities in which it trades and may reduce the exposure to
market risk through the use of swaps, forwards, futures and option contracts.
AIGTG uses derivatives to manage the economic exposure of its various trading
positions and transactions from adverse movements of interest rates, foreign
currency exchange rates and commodity prices. AIGTG supports its trading
activities largely through trading liabilities, unrealized losses on swaps,
short-term borrowings, securities sold under agreements to repurchase and
securities and commodities sold but not yet purchased. (See also the discussions
under "Capital Resources" and "Derivatives" herein.)
The gross unrealized gains and gross unrealized losses of AIGFP and AIGTG
included in the financial services assets and liabilities at December 31, 2000
were as follows:
(IN MILLIONS)
-------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
-------------------------------------------------------------
Securities available for sale, at
market value(a) $ 810 $ 777
Unrealized gain/loss on interest
rate and currency swaps, options
and forward transactions(b)(c) 10,235 8,581
Trading assets 8,852 5,744
Spot commodities, at market value 32 --
Trading liabilities -- 3,372
Securities and spot commodities
sold but not yet purchased, at
market value 491 --
-------------------------------------------------------------
(a) See also Note 8(e) of Notes to Financial Statements.
(b) These amounts are also presented as the respective balance sheet amounts.
(c) At December 31, 2000, AIGTG's replacement values with respect to interest
rate and currency swaps were $484 million.
AIGFP's interest rate and currency risks on securities available for sale,
at market, are managed by taking offsetting positions on a security by security
basis, thereby offsetting a significant portion of the unrealized appreciation
or depreciation. At December 31, 2000, the unrealized gains and losses remaining
after the benefit of the offsets were $44 million and $11 million, respectively.
Trading securities, at market value, and securities and spot commodities
sold but not yet purchased, at market value are marked to market daily with the
unrealized gain or loss being recognized in income at that time. These
securities are held to meet the short-term risk management objectives of AIGFP
and AIGTG.
The senior management of AIG defines the policies and establishes general
operating parameters for AIGFP and AIGTG. AIG's senior management has
established various oversight committees to review the various financial market,
operational and credit issues of AIGFP and AIGTG. The senior managements of
AIGFP and AIGTG report the results of their respective operations to and review
future strategies with AIG's senior management.
AIG actively manages the exposures to limit potential losses, while
maximizing the rewards afforded by these business opportunities. In doing so,
AIG must continually manage a variety of exposures including credit, market,
liquidity, operational and legal risks.
Market risk arises principally from the uncertainty that future earnings
are exposed to potential changes in volatility, interest rates, foreign currency
exchange rates, and equity and commodity prices. AIG generally controls its
exposure to market risk by taking offsetting positions. AIG's philosophy with
respect to its financial services operations is to minimize or set limits for
open or uncovered positions that are to be carried. Credit risk exposure is
separately managed. (See the discussion on the management of credit risk below.)
AIG's Market Risk Management Department provides detailed independent
review of AIG's market exposures, particularly those market exposures of AIGFP
and AIGTG. This department determines whether AIG's market risks, as well as
those market risks of individual subsidiaries, are within the parameters
established by AIG's senior management. Well established market risk management
techniques such as sensitivity analysis are used. Additionally, this department
verifies that specific market risks of each of certain subsidiaries are managed
and hedged by that subsidiary.
AIGFP is exposed to market risk due to changes in the level and volatility
of interest rates and the shape and slope of the yield curve. AIGFP hedges its
exposure to interest rate risk by entering into transactions such as interest
rate swaps and options and purchasing U.S. and foreign government obligations.
AIGFP is exposed to market risk due to changes in and volatility of foreign
currency exchange rates. AIGFP hedges its foreign currency exchange risk
primarily through the use of currency swaps, options, forwards and futures.
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AIGFP is exposed to market risk due to changes in the level and volatility
of equity prices which affect the value of securities or instruments that derive
their value from a particular stock, a basket of stocks or a stock index. AIGFP
reduces the risk of loss inherent in its inventory in equity securities by
entering into hedging transactions, including equity swaps and options and
purchasing U.S. and foreign government obligations.
AIGFP does not seek to manage the market risk of each of its transactions
through an individual offsetting transaction. Rather, AIGFP takes a portfolio
approach to the management of its market risk exposure. AIGFP values its
portfolio at market value or estimated fair value when market values are not
readily available. These valuations represent an assessment of the present
values of expected future cash flows of AIGFP's transactions and may include
reserves for such risks as are deemed appropriate by AIGFP's and AIG's
management. AIGFP evaluates the portfolio's discounted cash flows with reference
to current market conditions, maturities within the portfolio and other relevant
factors. Based upon this evaluation, AIGFP determines what, if any, offsetting
transactions are necessary to reduce the market risk exposure of the portfolio.
The aforementioned estimated fair values are based upon the use of
valuation models. These models utilize, among other things, current interest,
foreign exchange and volatility rates. These valuation models are integrated
into the evaluation of the portfolio, as described above, in order to provide
timely information for the market risk management of the portfolio.
Additionally, depending upon the changes in interest rates and other market
movements during the day, the system will produce reports for management's
consideration for intra-day offsetting positions. Overnight, the system
generates reports which recommend the types of offsets management should
consider for the following day. Additionally, AIGFP operates in major business
centers overseas and is essentially open for business 24 hours a day. Thus, the
market exposure and offset strategies are monitored, reviewed and coordinated
around the clock. Therefore, offsetting adjustments can be made as and when
necessary from any AIGFP office in the world.
As part of its monitoring and controlling of its exposure to market risk,
AIGFP applies various testing techniques which reflect potential market
movements. These techniques vary by currency and are regularly changed to
reflect factors affecting the derivatives portfolio. In addition to the daily
monitoring, AIGFP's senior management and local risk managers conduct a weekly
review of the derivatives portfolio and existing hedges. This review includes an
examination of the portfolio's risk measures, such as aggregate option
sensitivity to movements in market variables. AIGFP's management may change
these measures to reflect their judgment and evaluation of the dynamics of the
markets. This management group will also determine whether additional or
alternative action is required in order to manage the portfolio.
All of AIGTG's market risk sensitive instruments are entered into for
trading purposes. The fair values of AIGTG's financial instruments are exposed
to market risk as a result of adverse market changes in interest rates, foreign
currency exchange rates, commodity prices and adverse changes in the liquidity
of the markets in which AIGTG trades.
AIGTG's approach to managing market risk is to establish an appropriate
offsetting position to a particular transaction or group of transactions
depending upon the extent of market risk AIGTG expects to reduce.
AIGTG's senior management has established positions and stop-loss limits
for each line of business. AIGTG's traders are required to maintain positions
within these limits. These positions are monitored during the day either
manually and/or through on-line computer systems. In addition, these positions
are reviewed by AIGTG's management. Reports which present each trading books
position and the prior day's profit and loss are reviewed by traders, head
traders and AIGTG's senior management. Based upon these and other reports,
AIGTG's senior management may determine to adjust AIGTG's risk profile.
AIGTG attempts to secure reliable current market prices, such as published
prices or third party quotes, to value its derivatives. Where such prices are
not available, AIGTG uses an internal methodology which includes interpolation
or extrapolation from verifiable prices nearest to the dates of the
transactions. The methodology may reflect interest and exchange rates, commodity
prices, volatility rates and other relevant factors.
A significant portion of AIGTG's business is transacted in liquid markets.
Certain of AIGTG's derivative product exposures are evaluated using simulation
techniques which consider such factors as changes in currency and commodity
prices, interest rates, volatility levels and the effect of time.
AIGFP and AIGTG are both exposed to the risk of loss of fair value from
adverse fluctuations in interest rate and foreign currency exchange rates and
equity and commodity prices. AIG statistically measured the losses of fair value
through the application of a VaR model. AIG separately calculated the VaR with
respect to AIGFP and AIGTG, as AIG manages these operations separately.
AIGFP's and AIGTG's asset and liability portfolios for which the VaR
analyses were performed included over the counter and exchange traded
investments, derivative instruments and commodities. Since the market risk with
respect to securities available for sale, at market is substantially hedged,
segregation of market sensitive instruments into trading and other than trading
was not deemed necessary.
AIG calculated the VaR with respect to AIGFP and AIGTG as of December 31,
2000 and December 31, 1999. AIG has refined its methodology for calculating VaR
and the results of the calculations presented herein were performed using
historical simulation. Using historical simulation over the delta-normal
approach does not significantly change the results of this disclosure. The
historical simulation methodology entails re-pricing all assets and liabilities
under explicit changes in market rates within a
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American International Group, Inc. and Subsidiaries
specific historical time period. In this case, the most recent three years of
historical market information for interest rates, foreign exchange rates, and
equity index prices were used to construct the historical scenarios. For each
scenario, each transaction was re-priced. Portfolio, business unit and finally
AIG-wide scenario values were then calculated by netting the values of all the
underlying assets and liabilities. The final VaR number represents the maximum
potential loss incurred by these scenarios with 95% confidence (i.e., only 5% of
historical scenarios show losses greater than the VaR figure).
The following table presents the VaR on a combined basis and of each
component of AIGFP's and AIGTG's market risk as of December 31, 2000 and
December 31, 1999. VaR with respect to combined operations cannot be derived by
aggregating the individual risk presented herein.
(IN MILLIONS)
------------------------------------------------------------------
AIGFP(A) AIGTG(B)
------------ ------------
2000 1999 2000 1999
-----------------------------------------------------------
MARKET RISK:
Combined $15 $24 $6 $5
Interest rate 15 23 4 3
Currency -- -- 3 4
Equity/Commodity -- 1 -- --
-----------------------------------------------------------
(a) A one month holding period was used to measure the market exposures of
AIGFP.
(b) A one day holding period was used to measure the market exposures of AIGTG.
The average, high and low VaRs on a combined basis for the year ended
December 31, 2000 were approximately $15 million, $24 million and $8 million,
respectively, for AIGFP and approximately $5 million, $6 million and $4 million,
respectively, for AIGTG. The average, high and low VaRs for the interest rate
component of market risk were approximately $15 million, $23 million and $7
million, respectively, for AIGFP and approximately $3 million, $4 million and $3
million, respectively, for AIGTG for that year. The average, high and low VaRs
for the currency component were approximately $267,000, $396,000 and $118,000,
respectively, for AIGFP and approximately $3 million, $4 million and $2 million,
respectively, for AIGTG; and the average, high and low VaRs for the
equity/commodity component were approximately $1 million, $2 million and
$371,000, respectively, for AIGFP.
DERIVATIVES
Derivatives are financial arrangements among two or more parties whose returns
are linked to or "derived" from some underlying equity, debt, commodity or other
asset, liability, or index. Derivatives payments may be based on interest rates
and exchange rates and/or prices of certain securities, certain commodities, or
financial or commodity indices. The more significant types of derivative
arrangements in which AIG transacts are swaps, forwards, futures, options and
related instruments.
The most commonly used swaps are interest rate swaps, currency swaps,
equity swaps and swaptions. Such derivatives are traded over the counter. An
interest rate swap is a contract between two parties to exchange interest rate
payments (typically a fixed interest rate versus a variable interest rate)
calculated on a notional principal amount for a specified period of time. The
notional amount is not exchanged. Currency and equity swaps are similar to
interest rate swaps but may involve the exchange of principal amounts at the
commencement and termination of the swap. Swaptions are options where the holder
has the right but not the obligation to enter into a swap transaction or cancel
an existing swap transaction.
A futures or forward contract is a legal contract between two parties to
purchase or sell at a specified future date a specified quantity of a commodity,
security, currency, financial index or other instrument, at a specified price. A
futures contract is traded on an exchange, while a forward contract is executed
over the counter.
Over the counter derivatives are not transacted in an exchange traded
environment. The futures exchanges maintain considerable financial requirements
and surveillance to ensure the integrity of exchange traded futures and options.
An option contract generally provides the option purchaser with the right
but not the obligation to buy or sell during a period of time or at a specified
date the underlying instrument at a set price. The option writer is obligated to
sell or buy the underlying item if the option purchaser chooses to exercise his
right. The option writer receives a nonrefundable fee or premium paid by the
option purchaser. Options may be traded over the counter or on an exchange.
Derivatives are generally either negotiated over the counter contracts or
standardized contracts executed on an exchange. Standardized exchange traded
derivatives include futures and options which can be readily bought or sold over
recognized security or commodity exchanges and settled daily through such
clearing houses. Negotiated over the counter derivatives include forwards, swaps
and options. Over the counter derivatives are generally not traded like exchange
traded securities and the terms of over the counter derivatives are non-standard
and unique to each contract. However, in the normal course of business, with the
agreement of the original counterparty, these contracts may be terminated early
or assigned to another counterparty.
All significant derivatives activities are conducted through AIGFP and
AIGTG permitting AIG to participate in the derivatives dealer market acting
primarily as principal. In these derivative operations, AIG structures
agreements which generally allow its counterparties to enter into transactions
with respect to changes in interest and exchange rates, securities' prices and
certain commodities and financial or commodity indices. Generally, derivatives
are used by AIG's customers such as corporations, financial institutions,
multinational organizations, sovereign entities, govern-
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ment agencies and municipalities. For example, a futures, forward or option
contract can be used to protect the customers' assets or liabilities against
price fluctuations.
A counterparty may default on any obligation to AIG, including a derivative
contract. Credit risk is a consequence of extending credit and/or carrying
trading and investment positions. Credit risk exists for a derivative contract
when that contract has an estimated positive fair value. To help manage this
risk, the credit departments of AIGFP and AIGTG operate within the guidelines of
the AIG Credit Risk Committee, which sets credit policy and limits for
counterparties and provides limits for derivative transactions with
counterparties having different credit ratings. In addition to credit ratings,
this committee takes into account other factors, including the industry and
country of the counterparty. Transactions which fall outside these
pre-established guidelines require the approval of the AIG Credit Risk
Committee. It is also AIG's policy to establish reserves for potential credit
impairment when necessary.
AIGFP and AIGTG determine the credit quality of each of their
counterparties taking into account credit ratings assigned by recognized
statistical rating organizations. If it is determined that a counterparty
requires credit enhancement, then one or more enhancement techniques will be
used. Examples of such enhancement techniques include letters of credit,
guarantees, collateral credit triggers and credit derivatives and margin
agreements.
A significant majority of AIGFP's transactions are contracted and
documented under ISDA Master Agreements. Management believes that such
agreements provide for legally enforceable set-off in the event of default.
Also, under such agreements, in connection with a counterparty desiring to
terminate a contract prior to maturity, AIGFP may be permitted to set-off its
receivables from that counterparty against AIGFP's payables to that same
counterparty arising out of all included transactions. Excluding regulated
exchange transactions, AIGTG, whenever possible, enters into netting agreements
with its counterparties which are similar in effect to those discussed above.
The following tables provide the notional and contractual amounts of
AIGFP's and AIGTG's derivatives transactions at December 31, 2000 and December
31, 1999.
The notional amounts used to express the extent of AIGFP's and AIGTG's
involvement in swap transactions represent a standard of measurement of the
volume of AIGFP's and AIGTG's swaps business. Notional amount is not a
quantification of market risk or credit risk and it may not necessarily be
recorded on the balance sheet. Notional amounts represent those amounts used to
calculate contractual cash flows to be exchanged and are not paid or received,
except for certain contracts such as currency swaps.
The timing and the amount of cash flows relating to AIGFP's and AIGTG's
foreign exchange forwards and exchange traded futures and options contracts are
determined by each of the respective contractual agreements.
The net replacement value most closely represents the net credit risk to
AIGFP or the maximum amount exposed to potential loss after the application of
the aforementioned strategies, netting under ISDA Master Agreements and applying
collateral held. Prior to the application of these credit enhancements, the
gross credit risk with respect to these derivative instruments was $33.4 billion
at December 31, 2000 and $16.90 billion at December 31, 1999. Subsequent to the
application of such credit enhancements, the net exposure to credit risk or the
net replacement value of all interest rate, currency and equity swaps, swaptions
and forward commitments approximated $9.51 billion at December 31, 2000 and
$7.53 billion at December 31, 1999. The net replacement value for futures and
forward contracts approximated $204 million at December 31, 2000 and $5 million
at December 31, 1999. The net replacement value most closely represents the net
credit risk to AIGFP or the maximum amount exposed to potential loss.
The following table presents AIGFP's derivatives portfolio by maturity and
type of derivative at December 31, 2000 and December 31, 1999:
(IN MILLIONS)
----------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
---------------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 2000 1999
----------------------------------------------------------------------------------------------------------------------------
Interest rate, currency and equity/commodity
swaps and swaptions:
Notional amount:
Interest rate swaps $ 70,847 $173,892 $ 90,745 $ 8,719 $344,203 $281,682
Currency swaps 34,507 44,271 33,185 5,829 117,792 83,673
Swaptions and equity swaps 12,216 30,835 10,692 5,283 59,026 48,002
----------------------------------------------------------------------------------------------------------------------------
Total $117,570 $248,998 $134,622 $19,831 $521,021 $413,357
----------------------------------------------------------------------------------------------------------------------------
FUTURES AND FORWARD CONTRACTS:
Exchange traded futures contracts contractual
amount $ 11,082 -- -- -- $ 11,082 $ 6,587
----------------------------------------------------------------------------------------------------------------------------
Over the counter forward contracts contractual
amount $ 22,263 $ 502 $ 44 -- $ 22,809 $ 21,873
----------------------------------------------------------------------------------------------------------------------------
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American International Group, Inc. and Subsidiaries
AIGFP determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 2000 and
December 31, 1999, the counterparty credit quality by derivative product with
respect to the net replacement value of AIGFP's derivatives portfolio was as
follows:
(IN MILLIONS)
-----------------------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE
------------------------------------
SWAPS AND FUTURES AND TOTAL TOTAL
SWAPTIONS FORWARD CONTRACTS 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
Counterparty credit quality:
AAA $3,778 $ -- $3,778 $2,067
AA 2,621 204 2,825 2,839
A 1,801 -- 1,801 1,576
BBB 1,059 -- 1,059 997
Below investment grade 252 -- 252 55
-----------------------------------------------------------------------------------------------------------------------------
Total $9,511 $204 $9,715 $7,534
-----------------------------------------------------------------------------------------------------------------------------
At December 31, 2000 and December 31, 1999, the counterparty breakdown by
industry with respect to the net replacement value of AIGFP's derivatives
portfolio was as follows:
(IN MILLIONS)
-----------------------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE
------------------------------------
SWAPS AND FUTURES AND TOTAL TOTAL
SWAPTIONS FORWARD CONTRACTS 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
Non-U.S. banks $2,419 $ 98 $2,517 $2,515
Insured municipalities 595 -- 595 352
U.S. industrials 1,945 -- 1,945 780
Governmental 463 -- 463 180
Non-U.S. financial service companies 309 -- 309 158
Non-U.S. industrials 1,372 -- 1,372 1,117
Special purpose 1,204 -- 1,204 716
U.S. banks 114 106 220 510
U.S. financial service companies 894 -- 894 1,112
Supranationals 196 -- 196 94
-----------------------------------------------------------------------------------------------------------------------------
Total $9,511 $204 $9,715 $7,534
-----------------------------------------------------------------------------------------------------------------------------
The gross replacement values presented in the following table represent the
sum of the estimated positive fair values of all of AIGTG's derivatives
contracts at December 31, 2000 and December 31, 1999. These values do not
represent the credit risk to AIGTG.
The net replacement values presented represent the net sum of estimated
positive fair values after the application of legally enforceable master netting
agreements and collateral held. The net replacement values most closely
represent the net credit risk to AIGTG or the maximum amount exposed to
potential loss.
The following table provides the contractual and notional amounts and
credit exposure, if applicable, by maturity and type of derivative of AIGTG's
derivatives portfolio at December 31, 2000 and December 31, 1999. In addition,
the estimated positive fair values associated with the derivatives portfolio are
also provided
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and include a maturity profile for the December 31, 2000 balances based upon the
expected timing of the future cash flows.
(IN MILLIONS)
---------------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
------------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 2000 1999
---------------------------------------------------------------------------------------------------------------------------------
Contractual amount of futures, forwards and options:
Exchange traded futures and options $ 13,715 $ 4,318 $ 31 $ -- $ 18,064 $ 18,908
---------------------------------------------------------------------------------------------------------------------------------
Forwards $216,062 $ 16,160 $ 2,094 $ -- $234,316 $220,428
---------------------------------------------------------------------------------------------------------------------------------
Over the counter purchased options $ 59,922 $ 19,581 $ 25,222 $ 194 $104,919 $ 83,871
---------------------------------------------------------------------------------------------------------------------------------
Over the counter sold options(a) $ 58,754 $ 19,369 $ 25,422 $ 197 $103,742 $ 86,726
---------------------------------------------------------------------------------------------------------------------------------
Notional amount:
Interest rate swaps and forward rate agreements $ 18,960 $ 36,598 $ 7,592 $ 114 $ 63,264 $ 80,436
Currency swaps 1,071 6,668 834 -- 8,573 8,359
Swaptions 2,398 10,978 1,970 73 15,419 9,996
---------------------------------------------------------------------------------------------------------------------------------
Total $ 22,429 $ 54,244 $ 10,396 $ 187 $ 87,256 $ 98,791
---------------------------------------------------------------------------------------------------------------------------------
Credit exposure:
Futures, forwards, swaptions and purchased options
contracts and interest rate and currency swaps:
Gross replacement value $ 7,219 $ 2,263 $ 831 $ 6 $ 10,319 $ 7,889
Master netting arrangements (4,061) (1,467) (602) (6) (6,136) (4,580)
Collateral (65) (34) (8) -- (107) (209)
---------------------------------------------------------------------------------------------------------------------------------
Net replacement value(b) $ 3,093 $ 762 $ 221 $ -- $ 4,076 $ 3,100
---------------------------------------------------------------------------------------------------------------------------------
(a) Sold options obligate AIGTG to buy or sell the underlying item if the option
purchaser chooses to exercise. The amounts do not represent credit exposure.
(b) The net replacement values with respect to exchange traded futures and
options, forward contracts and purchased over the counter options are
presented as a component of trading assets in the accompanying balance
sheet. The net replacement values with respect to interest rate and currency
swaps are presented as a component of unrealized gain on interest rate and
currency swaps, options and forward transactions in the accompanying balance
sheet.
AIGTG determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 2000 and
December 31, 1999, the counterparty credit quality and counterparty breakdown by
industry with respect to the net replacement value of AIGTG's derivatives
portfolio were as follows:
(IN MILLIONS)
------------------------------------------------------------
NET REPLACEMENT VALUE
----------------------
2000 1999
------------------------------------------------------------
Counterparty credit quality:
AAA $ 442 $ 276
AA 1,807 1,241
A 1,139 1,010
BBB 460 256
Below investment grade 48 49
Not externally rated, including
exchange traded futures and
options* 180 268
------------------------------------------------------------
Total $4,076 $3,100
------------------------------------------------------------
(IN MILLIONS)
------------------------------------------------------------
NET REPLACEMENT VALUE
----------------------
2000 1999
------------------------------------------------------------
Counterparty breakdown by industry:
Non-U.S. banks $2,076 $ 926
U.S. industrials 67 70
Governmental 70 178
Non-U.S. financial service
companies 282 698
Non-U.S. industrials 243 176
U.S. banks 468 401
U.S. financial service companies 690 383
Exchanges* 180 268
------------------------------------------------------------
Total $4,076 $3,100
------------------------------------------------------------
* Exchange traded futures and options are not deemed to have significant credit
exposure as the exchanges guarantee that every contract will be properly
settled on a daily basis.
Generally, AIG manages and operates its businesses in the currencies of the
local operating environment. Thus, exchange gains or losses occur when AIG's
foreign currency net investment is affected by changes in the foreign exchange
rates relative to the U.S. dollar from one reporting period to the next.
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American International Group, Inc. and Subsidiaries
AIG, through its Foreign Exchange Operating Committee, evaluates each of
its worldwide consolidated foreign currency net asset or liability positions and
manages AIG's translation exposure to adverse movement in currency exchange
rates. AIG may use forward exchange contracts and purchase options where the
cost of such is reasonable and markets are liquid to reduce these exchange
translation exposures. The exchange gain or loss with respect to these hedging
instruments is recorded on an accrual basis as a component of comprehensive
income in capital funds.
As an end user, AIG and its subsidiaries, including its insurance
subsidiaries, use derivatives to aid in managing AIG's foreign exchange
translation exposure. Derivatives may also be used to minimize certain exposures
with respect to AIG's debt financing and its insurance operations; to date, such
activities have not been significant.
AIG has formed a Derivatives Review Committee. This committee, with certain
exceptions, provides an independent review of any proposed derivative
transaction. The committee examines, among other things, the nature and purpose
of the derivative transaction, its potential credit exposure, if any, and the
estimated benefits. This committee does not review those derivative transactions
entered into by AIGFP and AIGTG for their own accounts.
Legal risk arises from the uncertainty of the enforceability, through legal
or judicial processes, of the obligations of AIG's clients and counterparties,
including contractual provisions intended to reduce credit exposure by providing
for the netting of mutual obligations. (See also the discussion on master
netting agreements above.) AIG seeks to eliminate or minimize such uncertainty
through continuous consultation with internal and external legal advisors, both
domestically and abroad, in order to understand the nature of legal risk, to
improve documentation and to strengthen transaction structure.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" (FASB 133). In June 2000, FASB issued Statement of
Financial Accounting Standards No. 138 "Accounting for Derivative Instruments
and Hedging Activities-an amendment of FASB Statement No. 133" (collectively,
FASB 133).
FASB 133 requires AIG to recognize all derivatives in the consolidated
balance sheet at fair value. The financial statement recognition of the change
in the fair value of a derivative depends on a number of factors, including the
intended use of the derivative and the extent to which it is effective as part
of a hedge transaction. The changes in fair value of the derivative transactions
of AIGFP and AIGTG are currently presented, in all material respects, as a
component of AIG's operating income.
AIG adopted FASB 133 on January 1, 2001. In accordance with the transition
provisions of FASB 133, AIG recorded in its consolidated income statement for
the first quarter of 2001 a cumulative effect on an accounting change adjustment
loss of $6 million. This loss represents the net fair value of all previously
unrecorded derivative instruments as of January 1, 2001, net of tax and after
the application of hedge accounting. AIG also recorded in its consolidated
statement of comprehensive income for the first quarter of 2001 a cumulative
effect of an accounting change adjustment gain of $150 million. This gain
represents the increase in other comprehensive income, net of taxes, arising
from recognizing the fair value of all derivative contracts designated as cash
flow hedging instruments, and to a lesser extent, hedging instruments used to
hedge net investments in foreign operations.
RECENT DEVELOPMENTS
On November 22, 2000, AIG completed its acquisition of HSB Group, Inc. (HSB),
which through its subsidiary, The Hartford Steam Boiler Inspection and Insurance
Company, provides equipment breakdown and other specialty insurance coverages.
Each of the outstanding shares of HSB common stock was exchanged for 0.4178 of a
share of AIG common stock resulting in the issuance of 12.2 million shares of
AIG common stock. The acquisition has been accounted for as a purchase and HSB's
results of operations have been consolidated with those of AIG since the date of
acquisition.
On February 23, 2001, AIG announced that it had been named the exclusive
sponsor for the reorganization of The Chiyoda Mutual Life Insurance Company
(Chiyoda) by its Legal Trustee. In connection with the reorganization, AIG
expects to make a capital contribution to Chiyoda of approximately $522 million.
AIG expects to close the transaction by mid-April, subject to the approval of
Japanese regulatory authorities.
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REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
AMERICAN INTERNATIONAL GROUP, INC.:
In our opinion, based upon our audits and the report of other auditors, the
accompanying supplemental consolidated balance sheets and the related
supplemental consolidated statements of income, capital funds, cash flows and
comprehensive income present fairly, in all material respects, the financial
position of American International Group, Inc. and subsidiaries as of December
31, 2000 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, based on our audits and the report of other
auditors, the related supplemental financial statement schedules present fairly,
in all material aspects, the information set forth therein when read in
conjunction with the related supplemental consolidated financial statements.
These financial statements and financial statement schedules are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits. We did not audit the financial statements or financial statement
schedules of American General Corporation, a wholly-owned subsidiary, which
statements reflect total assets of $120,094 million and $115,447 million at
December 31, 2000 and 1999, respectively, and total revenues of $11,063 million,
$10,679 million and $10,251 million for each of the three years in the period
ended December 31, 2000. Those statements were audited by other auditors whose
report thereon has been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for American General Corporation,
is based solely on the report of the other auditors. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
The accompanying supplemental consolidated financial statements give retroactive
effect to the acquisition of American General Corporation by American
International Group, Inc. on August 29, 2001, which has been accounted for as a
pooling of interests as described in the Note 1 to the supplemental consolidated
financial statements. Accounting principles generally accepted in the United
States of America proscribe giving effect to a consummated business combination
accounted for by the pooling of interests method in financial statements that do
not include the date of consummation. These financial statements do not extend
through the date of consummation; however, they will become the historical
consolidated financial statements of American International Group, Inc. and
subsidiaries after financial statements covering the date of consummation of the
business combination are issued.
PricewaterhouseCoopers LLP
New York, New York
February 7, 2001,
except as to the pooling of interests
with American General Corporation which
is as of August 29, 2001
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REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
AMERICAN GENERAL CORPORATION:
We have audited the consolidated balance sheets of American General Corporation
and subsidiaries as of December 31, 2000 and 1999, and the related consolidated
statements of income, shareholders' equity, comprehensive income, and cash flows
for each of the three years in the period ended December 31, 2000 (not presented
separately herein). Our audits also included the related financial statement
schedules (not presented separately herein). These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American General
Corporation and subsidiaries as of December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
Houston, Texas
January 23, 2001
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SUPPLEMENTAL CONSOLIDATED BALANCE SHEET American International Group, Inc. and
Subsidiaries
(IN MILLIONS)
----------------------------------------------------------------------------------
DECEMBER 31, 2000 1999
----------------------------------------------------------------------------------
ASSETS:
Investments and cash:
Fixed maturities:
Bonds available for sale, at market value (amortized
cost: 2000 -- $153,921; 1999 -- $140,593) $153,763 $137,653
Bonds held to maturity, at amortized cost (market
value: 2000 -- $12,053; 1999 -- $12,202) 11,533 12,078
Bonds trading securities, at market value (cost:
2000 -- $838; 1999 -- $1,057) 846 1,038
Equity securities:
Common stocks (cost: 2000 -- $7,051; 1999 -- $6,021) 6,805 6,567
Non-redeemable preferred stocks (cost: 2000 -- $1,318;
1999 -- $826) 1,207 820
Mortgage loans on real estate, net of allowance
(2000 -- $104; 1999 -- $104) 11,047 10,825
Policy loans 5,465 5,197
Collateral and guaranteed loans, net of allowance
(2000 -- $40; 1999 -- $74) 2,084 2,173
Financial services and asset management assets:
Flight equipment primarily under operating leases, net
of accumulated depreciation (2000 -- $2,723;
1999 -- $2,200) 19,325 17,334
Securities available for sale, at market value
(amortized cost: 2000 -- $14,636; 1999 -- $12,920) 14,669 12,954
Trading securities, at market value 7,347 4,391
Spot commodities, at market value 363 683
Unrealized gain on interest rate and currency swaps,
options and forward transactions 10,235 7,931
Trading assets 7,045 5,793
Securities purchased under agreements to resell, at
contract value 14,991 10,897
Finance receivables, net of allowance (2000 -- $383;
1999 -- $396) 11,378 10,634
Other invested assets 13,486 9,978
Short-term investments, at cost (approximates market
value) 6,502 7,683
Cash 522 426
----------------------------------------------------------------------------------
Total investments and cash 298,613 265,055
Investment income due and accrued 3,522 3,130
Premiums and insurance balances receivable -- net of
allowance (2000 -- $170; 1999 -- $133) 11,832 12,236
Reinsurance assets 23,964 20,215
Deferred policy acquisition costs 16,647 15,774
Investments in partially-owned companies 336 417
Real estate and other fixed assets, net of accumulated
depreciation (2000 -- $2,264; 1999 -- $2,037) 4,126 3,508
Separate and variable accounts 54,562 53,763
Other assets 13,069 9,587
----------------------------------------------------------------------------------
TOTAL ASSETS $426,671 $383,685
----------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
28
30
--------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET (CONTINUED) American International
Group, Inc. and Subsidiaries
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
----------------------------------------------------------------------------------
DECEMBER 31, 2000 1999
----------------------------------------------------------------------------------
LIABILITIES:
Reserve for losses and loss expenses $ 40,613 $ 38,252
Reserve for unearned premiums 12,510 11,450
Future policy benefits for life and accident and health
insurance contracts 51,532 47,759
Policyholders' contract deposits 99,327 92,883
Other policyholders' funds 5,885 5,730
Reserve for commissions, expenses and taxes 2,807 2,598
Insurance balances payable 2,794 2,676
Funds held by companies under reinsurance treaties 1,435 861
Income taxes payable:
Current 189 152
Deferred 3,032 1,570
Financial services and asset management liabilities:
Borrowings under obligations of guaranteed investment
agreements 13,595 9,430
Securities sold under agreements to repurchase, at
contract value 11,308 6,116
Trading liabilities 4,352 3,821
Securities and spot commodities sold but not yet
purchased, at market value 7,701 6,413
Unrealized loss on interest rate and currency swaps,
options and forward transactions 8,581 8,624
Trust deposits and deposits due to banks and other
depositors 1,895 2,175
Commercial paper 9,421 7,447
Notes, bonds and loans payable 23,594 22,523
Commercial paper 3,626 3,378
Notes, bonds, loans and mortgages payable 4,087 3,532
Separate and variable accounts 54,562 53,763
Minority interest 1,465 1,350
Other liabilities 11,507 8,637
----------------------------------------------------------------------------------
TOTAL LIABILITIES 375,818 341,140
----------------------------------------------------------------------------------
PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY COMPANIES 3,414 2,904
----------------------------------------------------------------------------------
CAPITAL FUNDS:
Common stock, $2.50 par value; 5,000,000,000 shares
authorized; shares issued 2000 -- 2,787,511,574; 1999 --
1,972,554,745 6,914 4,870
Additional paid-in capital 2,830 2,324
Retained earnings 42,598 38,772
Accumulated other comprehensive income (loss) (2,440) (3,381)
Treasury stock, at cost; 2000 -- 164,905,649;
1999 -- 136,172,921 shares of common stock (including
133,198,299 and 88,350,180 shares, respectively, held by
subsidiaries) (2,463) (2,944)
----------------------------------------------------------------------------------
TOTAL CAPITAL FUNDS 47,439 39,641
----------------------------------------------------------------------------------
TOTAL LIABILITIES AND CAPITAL FUNDS $426,671 $383,685
----------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
29
31
--------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME American International Group,
Inc. and Subsidiaries
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
---------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2000 1999 1998
---------------------------------------------------------------------------------------------------------
GENERAL INSURANCE OPERATIONS:
Net premiums written $17,526 $16,224 $14,586
Change in unearned premium reserve (119) (680) (488)
---------------------------------------------------------------------------------------------------------
Net premiums earned 17,407 15,544 14,098
Net investment income 2,701 2,517 2,192
Realized capital gains 38 295 205
---------------------------------------------------------------------------------------------------------
20,146 18,356 16,495
---------------------------------------------------------------------------------------------------------
Losses incurred 11,379 9,819 9,164
Loss expenses incurred 1,725 1,919 1,493
Underwriting expenses (principally policy acquisition
costs) 3,518 3,137 2,910
---------------------------------------------------------------------------------------------------------
16,622 14,875 13,567
---------------------------------------------------------------------------------------------------------
OPERATING INCOME 3,524 3,481 2,928
---------------------------------------------------------------------------------------------------------
LIFE INSURANCE OPERATIONS:
Premium income 17,173 15,480 13,725
Net investment income 10,664 9,505 8,357
Realized capital losses (162) (148) (74)
---------------------------------------------------------------------------------------------------------
27,675 24,837 22,008
---------------------------------------------------------------------------------------------------------
Death and other benefits 9,310 8,618 8,059
Increase in future policy benefits 8,478 7,244 5,960
Acquisition and insurance expenses 5,065 4,765 4,393
---------------------------------------------------------------------------------------------------------
22,853 20,627 18,412
---------------------------------------------------------------------------------------------------------
OPERATING INCOME 4,822 4,210 3,596
---------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES OPERATING INCOME 1,678 1,432 1,181
---------------------------------------------------------------------------------------------------------
ASSET MANAGEMENT OPERATING INCOME 1,161 920 688
---------------------------------------------------------------------------------------------------------
EQUITY IN INCOME OF MINORITY-OWNED INSURANCE OPERATIONS -- -- 40
---------------------------------------------------------------------------------------------------------
OTHER REALIZED CAPITAL LOSSES (190) (44) (1)
---------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS) -- NET (972) (600) (849)
---------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 10,023 9,399 7,583
---------------------------------------------------------------------------------------------------------
INCOME TAXES:
Current 1,694 2,151 1,524
Deferred 1,277 682 666
---------------------------------------------------------------------------------------------------------
2,971 2,833 2,190
---------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 7,052 6,566 5,393
---------------------------------------------------------------------------------------------------------
MINORITY INTEREST (413) (380) (347)
---------------------------------------------------------------------------------------------------------
NET INCOME $ 6,639 $ 6,186 $ 5,046
---------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE:
Basic $ 2.55 $ 2.37 $ 1.96
Diluted 2.52 2.34 1.92
---------------------------------------------------------------------------------------------------------
AVERAGE SHARES OUTSTANDING:
Basic 2,607 2,611 2,568
Diluted 2,638 2,650 2,634
---------------------------------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
30
32
--------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CAPITAL FUNDS American International
Group, Inc. and Subsidiaries
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
---------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2000 1999 1998
---------------------------------------------------------------------------------------------------------
PREFERRED STOCK:
Balance at beginning of year $ -- $ 248 $ 248
Conversion to common stock -- (248) --
---------------------------------------------------------------------------------------------------------
Balance at end of year -- -- 248
---------------------------------------------------------------------------------------------------------
COMMON STOCK:
Balance at beginning of year 4,870 4,013 3,038
Issuance of common stock 7 (11) 26
Stock split effected as dividend 2,037 818 949
Issued in conversion of Series E preferred stock to
common stock -- 24 --
Issued in connection with redemption of Premium Equity
Redemption Cumulative Security Units (PERCS Units) -- 21 --
Issued under stock option and stock purchase plans -- 5 --
---------------------------------------------------------------------------------------------------------
Balance at end of year 6,914 4,870 4,013
---------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year 2,324 1,529 957
Issuance of common stock (7) 11 554
Excess of cost over proceeds of common stock issued
under stock option and stock purchase plans (161) (90) (41)
Excess of redemption value of Series E preferred stock
over par value of common stock issued -- 224 --
Excess of proceeds over par value of common stock issued
in connection with redemption of PERCS Units -- 410 --
Excess of proceeds over par value of common stock issued
under stock option and stock purchase plans -- 83 --
Excess of proceeds over cost of common stock issued in
connection with acquisitions 616 -- --
Conversion of preferred stock and preferred securities (83) -- --
Other 141 157 59
---------------------------------------------------------------------------------------------------------
Balance at end of year 2,830 2,324 1,529
---------------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 38,772 34,117 30,725
Net income 6,639 6,186 5,046
Stock dividends to shareholders (2,037) (818) (949)
Cash dividends to shareholders:
Preferred (1) (6) (18)
Common ($.30, $.27 and $.27 per share, respectively) (775) (703) (687)
Other -- (4) --
---------------------------------------------------------------------------------------------------------
Balance at end of year 42,598 38,772 34,117
---------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at beginning of year (3,381) 1,589 1,551
Unrealized appreciation (depreciation) of
investments -- net of reclassification adjustments 1,467 (6,398) 280
Deferred income tax (expense) benefit on changes (316) 1,875 (142)
Foreign currency translation adjustments (273) (432) (137)
Applicable income tax benefit (expense) on changes 63 (15) 37
---------------------------------------------------------------------------------------------------------
Other comprehensive income 941 (4,970) 38
---------------------------------------------------------------------------------------------------------
Balance at end of year (2,440) (3,381) 1,589
---------------------------------------------------------------------------------------------------------
TREASURY STOCK, AT COST:
Balance at beginning of year (2,944) (2,587) (2,436)
Cost of shares acquired during year (1,407) (700) (276)
Issued under stock option and stock purchase plans 343 300 125
Issued for conversion of preferred stock and preferred
securities 418 -- --
Issued in connection with acquisitions 1,127 43 --
---------------------------------------------------------------------------------------------------------
Balance at end of year (2,463) (2,944) (2,587)
---------------------------------------------------------------------------------------------------------
TOTAL CAPITAL FUNDS AT END OF YEAR $47,439 $39,641 $38,909
---------------------------------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
31
33
--------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS American International Group,
Inc. and Subsidiaries
(IN MILLIONS)
----------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2000 1999 1998
----------------------------------------------------------------------------------------------
SUMMARY:
Net cash provided by operating activities $ 8,446 $ 12,350 $ 9,650
Net cash used in investing activities (20,193) (26,262) (20,769)
Net cash provided by financing activities 11,843 13,694 11,413
----------------------------------------------------------------------------------------------
Change in cash 96 (218) 294
Cash at beginning of year 426 644 350
----------------------------------------------------------------------------------------------
Cash at end of year $ 522 $ 426 $ 644
----------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,639 $ 6,186 $ 5,046
----------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Non-cash revenues, expenses, gains and losses included
in income:
Change in:
General and life insurance reserves 7,928 7,890 8,609
Premiums and insurance balances receivable and
payable -- net 577 (586) (733)
Reinsurance assets (3,752) (1,624) (972)
Deferred policy acquisition costs (984) (2,020) (1,238)
Investment income due and accrued (346) (185) (111)
Funds held under reinsurance treaties 572 24 370
Other policyholders' funds 239 516 368
Current and deferred income taxes -- net 1,408 586 195
Reserve for commissions, expenses and taxes 68 373 455
Other assets and liabilities -- net (1,319) (1,314) (411)
Trading assets and liabilities -- net (721) (407) (216)
Trading securities, at market value (2,956) 1,277 (1,693)
Spot commodities, at market value 320 (207) (16)
Net unrealized gain on interest rate and currency
swaps, options and forward transactions (2,347) 3,519 (1,382)
Securities purchased under agreements to resell (4,094) (6,059) (287)
Securities sold under agreements to repurchase 5,192 1,643 1,767
Securities and spot commodities sold but not yet
purchased, at market value 1,288 1,956 (715)
Realized capital gains (losses) 314 (103) (130)
Equity in income of partially-owned companies and other
invested assets (327) (186) (176)
Depreciation expenses, principally flight equipment 1,243 1,130 1,011
Change in cumulative translation adjustments (273) (432) (137)
Provision for finance receivable losses 206 207 212
Other -- net (429) 166 (166)
----------------------------------------------------------------------------------------------
Total adjustments 1,807 6,164 4,604
----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 8,446 $ 12,350 $ 9,650
----------------------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
32
34
--------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) American
International Group, Inc. and Subsidiaries
(IN MILLIONS)
----------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2000 1999 1998
----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of fixed maturities, at amortized cost matured or
redeemed $ 1,227 $ 1,062 $ 1,578
Cost of bonds, at market sold 37,700 46,456 40,259
Cost of bonds, at market matured or redeemed 7,359 8,178 8,315
Cost of equity securities sold 5,162 3,703 2,784
Realized capital gains (losses) (314) 103 130
Purchases of fixed maturities (58,001) (73,169) (58,163)
Purchases of equity securities (6,085) (3,821) (3,277)
Acquisitions, net of cash acquired (17) (29) (1,106)
Mortgage, policy and collateral loans granted (2,666) (3,498) (2,942)
Repayments of mortgage, policy and collateral loans 2,568 3,105 2,341
Sales of securities available for sale 5,588 4,787 2,618
Maturities of securities available for sale 1,559 787 1,848
Purchases of securities available for sale (8,890) (7,869) (5,967)
Sales of flight equipment 713 1,699 687
Purchases of flight equipment (3,432) (3,365) (3,160)
Net additions to real estate and other fixed assets (1,033) (602) (624)
Sales or distributions of other invested assets 4,397 2,995 2,869
Investments in other invested assets (6,285) (4,827) (5,109)
Change in short-term investments 1,314 (282) (1,783)
Investments in partially-owned companies 79 44 (1)
Finance receivable originations and purchased (6,282) (6,654) (6,589)
Finance receivable principal payments received 5,314 5,102 4,775
Other, net (168) (167) (252)
----------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES $(20,193) $(26,262) $(20,769)
----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in policyholders' contract deposits $ 5,451 $ 10,551 $ 5,157
Change in trust deposits and deposits due to banks and
other depositors (280) 493 (595)
Change in commercial paper 2,222 851 2,629
Proceeds from notes, bonds, loans and mortgages payable 12,212 10,280 9,937
Repayments on notes, bonds, loans and mortgages payable (10,770) (8,157) (6,193)
Proceeds from guaranteed investment agreements 9,957 7,927 6,540
Maturities of guaranteed investment agreements (5,792) (7,685) (5,353)
Proceeds from common stock issued 144 244 40
Proceeds from subsidiary company issuance of preferred
stock 742 194 --
Cash dividends to shareholders (776) (709) (705)
Acquisition of treasury stock (1,402) (700) (276)
Proceeds from redemption of Premium Equity Redemption
Cumulative Security Units -- 431 --
Other -- net 135 (26) 232
----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 11,843 $ 13,694 $ 11,413
----------------------------------------------------------------------------------------------
SUPPLEMENTARY INFORMATION:
TAXES PAID $ 1,345 $ 1,878 $ 1,712
----------------------------------------------------------------------------------------------
INTEREST PAID $ 3,524 $ 2,739 $ 2,755
----------------------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
33
35
--------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME American
International Group, Inc. and Subsidiaries
(IN MILLIONS)
-----------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2000 1999 1998
-----------------------------------------------------------------------------------------
COMPREHENSIVE INCOME:
Net income $6,639 $ 6,186 $5,046
-----------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME:
Unrealized appreciation (depreciation) of
investments -- net of reclassification adjustments 1,467 (6,398) 280
Deferred income tax (expense) benefit on changes (316) 1,875 (142)
Foreign currency translation adjustments (273) (432) (137)
Applicable income tax benefit (expense) on changes 63 (15) 37
-----------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME 941 (4,970) 38
-----------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $7,580 $ 1,216 $5,084
-----------------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
34
36
--------------------------------------------------------------------------------
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS American International Group, Inc.
and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION: On August 29, 2001 (the acquisition
date), American General Corporation (AGC), was acquired by AIG. In connection
with the acquisition, AIG issued approximately 290 million shares of its common
stock in exchange for all the outstanding common stock of AGC based on an
exchange ratio of 0.5790 of a share of AIG common stock for each share of AGC
common stock. The acquisition was accounted for as a pooling of interests and
the accompanying supplemental financial statements have been prepared to
retroactively combine AGC's financial statements for its year ended December 31
with AIG's December 31 financial statements. These statements do not extend
through the acquisition date. However, these statements will become AIG's
historical consolidated financial statements after AIG issues its financial
statements that include the acquisition date.
All of the share information included herein reflects the application of
the exchange ratio to the number of shares of AGC common stock outstanding at
the relevant times rather than the number of shares of AIG common stock actually
issued or outstanding at such times. In addition, AGC convertible preferred
stock has been included based on its AGC common stock equivalent in the restated
capital accounts.
The following is a reconciliation of the individual company results to the
combined results for 2000, 1999 and 1998:
(IN MILLIONS) AIG AGC TOTAL
---------------------------------------------------------------
DECEMBER 31, DECEMBER 31,
2000
Revenues $45,972 $11,063 $57,035
Net income 5,636 1,003 6,639
1999
Revenues 40,656 10,679 51,335
Net income 5,055 1,131 6,186
1998
Revenues 35,716 10,251 45,967
Net income 4,282 764 5,046
---------------------------------------------------------------
On January 1, 1999 (the merger date), SunAmerica Inc., a Maryland
corporation, merged with and into AIG. AIG issued 187.5 million shares of its
common stock in exchange for all the outstanding common stock and Class B stock
of SunAmerica Inc., based on an exchange ratio of 0.855 shares of AIG common
stock for each share of SunAmerica Inc. stock. A newly formed Delaware company,
SunAmerica Inc. (SunAmerica) holds substantially all of the assets previously
held by the Maryland corporation. The merger was accounted for as a pooling of
interests and the accompanying financial statements for 1998 have been restated
to combine SunAmerica Inc.'s financial statements for its fiscal year ended
September 30 with AIG's December 31 financial statements.
The following is a reconciliation of the individual company results to the
combined results for the 1998 twelve month period:
(IN MILLIONS) AIG SUNAMERICA TOTAL
----------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30,
1998
Revenues $33,296 $2,420 $35,716
Net income 3,766 516 4,282
----------------------------------------------------------------
The financial statements for the quarter ended March 31, 1999, included in
the AIG Quarterly Report on Form 10-Q reflected the operations of SunAmerica on
a pooling of interests basis and the change of its fiscal year from September 30
to December 31. For the period October 1, 1998 through December 31, 1998,
SunAmerica Inc.'s revenues were $318 million, operating income was $52 million
and net income was $29 million; dividends distributed were $33 million. Thus,
capital funds at December 31, 1999 reflect the net decrease in SunAmerica Inc.'s
retained earnings of $4 million and the decline of $94 million in accumulated
other comprehensive income.
AIG subsidiaries write property, casualty, marine, life and financial lines
insurance in approximately 130 countries and jurisdictions. Certain of AIG's
foreign subsidiaries included in the consolidated financial statements report on
a fiscal year ending November 30. All material intercompany accounts and
transactions have been eliminated.
Commencing with the third quarter 1998, Transatlantic and 21st Century were
consolidated into AIG's financial statements as AIG became the majority
shareholder of these entities. HSB Group, Inc. (HSB) was acquired on November
22, 2000 and consolidated into AIG's financial statements during the fourth
quarter of 2000.
(b) BASIS OF PRESENTATION: The accompanying financial statements have been
prepared on the basis of generally accepted accounting principles (GAAP). GAAP
prescribes the way to give effect to a consummated acquisition accounted for by
the pooling of interests method in financial statements that do not include the
date of acquisition. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could
differ from those estimates. Certain accounts have been reclassified in the 1999
and 1998 financial statements to conform to their 2000 presentation.
GENERAL INSURANCE OPERATIONS: AIG's general insurance subsidiaries are
multiple line companies writing substantially all lines of property and casualty
insurance. Premiums are earned primarily on a pro rata basis over the term of
the related coverage. The reserve for unearned premiums represents the portion
of premiums written relating to the unexpired terms of coverage.
Acquisition costs represent those costs, including commissions, that vary
with and are primarily related to the acquisition of new
35
37
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
business. These costs are deferred and amortized over the period in which the
related premiums written are earned. Investment income is not anticipated in the
deferral of acquisition costs. (See Note 4.)
Losses and loss expenses are charged to income as incurred. The reserve for
losses and loss expenses represents the accumulation of estimates for reported
losses and includes provisions for losses incurred but not reported. The methods
of determining such estimates and establishing resulting reserves, including
amounts relating to reserves for estimated unrecoverable reinsurance, are
continually reviewed and updated. Adjustments resulting therefrom are reflected
in income currently. AIG discounts certain of its loss reserves which are
primarily related to certain workers' compensation claims. (See Note 6.)
LIFE INSURANCE OPERATIONS: AIG's life insurance subsidiaries offer a wide
range of traditional insurance and financial and investment products.
Traditional products consist of individual and group life, annuity, endowment
and accident and health policies. Financial and investment products consist of
single premium annuity, variable annuities, guaranteed investment contracts,
universal life and pensions. Premiums for traditional life insurance products
and life contingent annuities, excluding accident and health products, are
recognized as revenues when due. Estimates for premiums due but not yet
collected are accrued. Benefits and expenses are provided against such revenues
to recognize profits over the estimated life of the policies. Revenues for
universal life and investment-type products consist of policy charges for the
cost of insurance, administration and surrenders during the period. Policy
charges collected with respect to future services are deferred and recognized in
a manner similar to the deferred policy acquisition costs related to such
products. Expenses include interest credited to policy account balances and
benefit payments made in excess of policy account balances. Accident and health
products are accounted for in a manner similar to general insurance products
described above. Investment income reflects certain amounts of realized capital
gains where the gains are deemed to be an inherent element in pricing certain
life products in some foreign countries.
Policy acquisition costs for traditional life insurance products are
generally deferred and amortized over the premium paying period of the policy.
Policy acquisition costs and policy initiation costs related to universal life
and investment-type products (non-traditional products) are deferred and
amortized, with interest, in relation to the incidence of estimated gross
profits to be realized over the estimated lives of the contracts. Estimated
gross profits are composed of net interest income, net realized investment gains
and losses, variable annuity fees, surrender charges and direct administrative
expenses.
The deferred acquisition costs with respect to non-traditional products are
adjusted with respect to estimated gross profits as a result of changes in the
net unrealized gains or losses on debt and equity securities available for sale.
That is, as debt and equity securities available for sale are carried at
aggregate fair value, an adjustment is made to deferred policy acquisition costs
equal to the change in amortization that would have been recorded if such
securities had been sold at their stated aggregate fair value and the proceeds
reinvested at current yields. The change in this adjustment, net of tax, is
included with the change in net unrealized gains/losses on debt and equity
securities available for sale that is credited or charged directly to
comprehensive income. Deferred policy acquisition costs have been decreased by
$190 million at December 31, 2000 and increased by $1.55 billion at December 31,
1999 for this adjustment. (See Note 4.)
The liabilities for future policy benefits and policyholders' contract
deposits are established using assumptions described in Note 6.
FINANCIAL SERVICES OPERATIONS: AIG participates in the derivatives dealer
market conducting, primarily as principal, an interest rate, currency, equity
and credit derivative products business. AIG also enters into structured
transactions including long-dated forward foreign exchange contracts, option
transactions, liquidity facilities and investment agreements and invests in a
diversified portfolio of securities.
AIG engages in market making and trading activities, as principal, in
foreign exchange, interest rates and precious and base metals. AIG owns
inventories in the commodities in which it trades and may reduce the exposure to
market risk through the use of swaps, forwards, futures and option contracts.
AIG, as lessor, leases flight equipment principally under operating leases.
Accordingly, income is reported over the life of the lease as rentals become
receivable under the provisions of the lease or, in the case of leases with
varying payments, under the straight-line method over the noncancelable term of
the lease. In certain cases, leases provide for additional amounts contingent on
usage. AIG is also a remarketer of flight equipment for its own account and for
airlines and financial institutions, and provides, for a fee, fleet management
services to certain third-party operators. AIG's revenues from such operations
consist of net gains on sales of flight equipment and commissions.
AIG provides a wide variety of consumer finance products, including
mortgages, retail sales finance and credit related insurance.
ASSET MANAGEMENT OPERATIONS: AIG's asset management operations offer a
wide variety of investment vehicles and services, including variable annuities,
mutual funds and investment asset management. Such products and services are
offered to individuals and institutions both domestically and internationally.
The fees generated with respect to asset management operations are recognized as
revenues when earned. Costs incurred in the sale of variable annuities and
mutual funds are deferred and subsequently amortized. With respect to variable
annuities, acquisition costs are amortized in relation to the incidence of
estimated gross profits to be realized over the estimated lives of the variable
annuity contracts. With respect to the sale of mutual funds, acquisition costs
are amortized over the estimated lives of the funds obtained.
(c) NON-CASH TRANSACTIONS: During 2000, AIG issued 17.77 million common
shares in connection with acquisitions. In
36
38
--------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
July 1998, 224,950 shares of 21st Century's Series A preferred stock were
converted into 19,584,368 shares of 21st Century's common stock.
(d) INVESTMENTS IN FIXED MATURITIES AND EQUITY SECURITIES: Bonds and
preferred stocks held to maturity, both of which are principally owned by the
insurance subsidiaries, are carried at amortized cost where AIG has the ability
and positive intent to hold these securities until maturity. Where AIG may not
have the positive intent to hold these securities until maturity, those bonds
are considered to be available for sale and carried at current market values.
Interest income with respect to fixed maturity securities is accrued currently.
Included in the bonds available for sale are collateralized mortgage
obligations (CMOs). Premiums and discounts arising from the purchase of CMOs are
treated as yield adjustments over their estimated lives.
Bond trading securities are carried at current market values, as it is
AIG's intention to sell these securities in the near term.
Common and non-redeemable preferred stocks are carried at current market
values. Dividend income is generally recognized when receivable.
Unrealized gains and losses from investments in equity securities and fixed
maturities available for sale are reflected as a separate component of
comprehensive income, net of deferred income taxes in capital funds currently.
Unrealized gains and losses from investments in trading securities are reflected
in income currently.
Realized capital gains and losses are determined principally by specific
identification. Where declines in values of securities below cost or amortized
cost are considered to be other than temporary, a charge is reflected in income
for the difference between cost or amortized cost and estimated net realizable
value.
(e) MORTGAGE LOANS ON REAL ESTATE, POLICY AND COLLATERAL
LOANS -- NET: Mortgage loans on real estate, policy loans and collateral loans
are carried at unpaid principal balances. Interest income on such loans is
accrued currently.
Impairment of mortgage loans on real estate and collateral loans is based
upon certain risk factors and when collection of all amounts due under the
contractual term is not probable. This impairment is generally measured based on
the present value of expected future cash flows discounted at the loan's
effective interest rate subject to the fair value of underlying collateral.
Interest income on such loans is recognized as cash is received.
There is no allowance for policy loans, as these loans serve to reduce the
death benefit paid when the death claim is made and the balances are effectively
collateralized by the cash surrender value of the policy.
(f) FLIGHT EQUIPMENT: Flight equipment is stated at cost. Major additions
and modifications are capitalized. Normal maintenance and repairs, airframe and
engine overhauls and compliance with return conditions of flight equipment on
lease are provided by and paid for by the lessee. Under the provisions of most
leases for certain airframe and engine overhauls, the lessee is reimbursed for
costs incurred up to but not exceeding contingent rentals paid to AIG by the
lessee. AIG provides a charge to income for such reimbursements based upon the
expected reimbursements during the life of the lease. Depreciation and
amortization are computed on the straight-line basis to a residual value of
approximately 15 percent over the estimated useful lives of the related assets
but not exceeding 25 years. AIG monitors the global aircraft market and the
values of various types and models of aircraft within that market relative to
the values of its own fleet. If events or circumstances were such that the
carrying amount of AIG's aircraft might be impaired, AIG would determine if such
impairment existed and recognize such impairment. This caption also includes
deposits for aircraft to be purchased.
At the time the assets are retired or disposed of, the cost and associated
accumulated depreciation and amortization are removed from the related accounts
and the difference, net of proceeds, is recorded as a gain or loss.
(g) SECURITIES AVAILABLE FOR SALE, AT MARKET VALUE: These securities are
held to meet long term investment objectives and are accounted for as available
for sale, carried at current market values and recorded on a trade date basis.
Unrealized gains and losses from valuing these securities and any related hedges
are reflected in capital funds currently, net of any related deferred income
taxes. When the underlying security is sold, the realized gain or loss resulting
from the hedging derivative transaction is recognized in income in that same
period as the realized gain or loss of the hedged security.
(h) FINANCE RECEIVABLES: Finance charges are recognized as revenue using
the interest method. Revenue ceases to be accrued when contractual payments are
not received for four consecutive months for loans and retail sales contracts,
and for six months for revolving retail accounts and private label receivables.
Extension fees, late charges, and prepayment penalties are recognized as revenue
when received.
Direct costs of originating loans, net of non-refundable points and fees,
are deferred and included in the carrying amount of the related loans. The
amount deferred is recognized as an adjustment to finance charge revenues, using
the interest method over the lesser of the contractual term or the expected life
based on prepayment experience. If loans are prepaid, any remaining deferral is
charged or credited to revenue.
Foreclosure proceedings are initiated on real estate loans when four
monthly installments are past due and these loans are charged off at
foreclosure. All other finance receivables are charged off when minimal or no
collections have been made for six months.
37
39
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The allowance for finance receivable losses is maintained at a level
considered adequate to absorb anticipated credit losses in the existing
portfolio. The portfolio is periodically evaluated on a pooled basis and
considers factors such as economic conditions, portfolio composition, and loss
and delinquency experience in the evaluation of the allowance.
(i) TRADING SECURITIES, AT MARKET VALUE: Trading securities are held to
meet short term investment objectives, including hedging securities. These
securities are recorded on a trade date basis and carried at current market
values. Unrealized gains and losses are reflected in income currently.
(j) SPOT COMMODITIES, AT MARKET VALUE: Spot commodities are carried at
current market values and are recorded on a settlement date basis. The exposure
to market risk may be reduced through the use of forwards, futures and option
contracts. Unrealized gains and losses of both commodities and any derivative
transactions are reflected in income currently.
(k) UNREALIZED GAIN AND UNREALIZED LOSS ON INTEREST RATE AND CURRENCY
SWAPS, OPTIONS AND FORWARD TRANSACTIONS: Interest rate swaps, currency swaps,
equity swaps, swaptions, options and forward transactions are accounted for as
contractual commitments recorded on a trade date basis and are carried at
current market values or estimated fair values when market values are not
available. Unrealized gains and losses are reflected in income currently.
Estimated fair values are based on the use of valuation models that utilize,
among other things, current interest, foreign exchange and volatility rates.
These valuations represent an assessment of the present values of expected
future cash flows of these transactions and may include reserves for market risk
as deemed appropriate. The portfolio's discounted cash flows are evaluated with
reference to current market conditions, maturities within the portfolio and
other relevant factors. Based upon this evaluation, it is determined what
offsetting transactions, if any, are necessary to reduce the market risk of the
portfolio. AIG manages its market risk with a variety of transactions, including
swaps, trading securities, futures and forward contracts and other transactions
as appropriate. Because of the limited liquidity of some of these instruments,
the recorded values of these transactions may be different than the values that
might be realized if AIG were to sell or close out the transactions prior to
maturity. AIG believes that such differences are not significant to the results
of operations, financial condition or liquidity. Such differences would be
immediately recognized when the transactions are sold or closed out prior to
maturity.
(l) TRADING ASSETS AND TRADING LIABILITIES: Trading assets and trading
liabilities include option premiums paid and received and receivables from and
payables to counterparties which relate to unrealized gains and losses on
futures, forwards and options and balances due from and due to clearing brokers
and exchanges.
Futures, forwards and options purchased and written are accounted for as
contractual commitments on a trade date basis and are carried at fair values.
Unrealized gains and losses are reflected in income currently. The fair values
of futures contracts are based on closing exchange quotations. Commodity forward
transactions are carried at fair values derived from dealer quotations and
underlying commodity exchange quotations. For long dated forward transactions,
where there are no dealer or exchange quotations, fair values are derived using
internally developed valuation methodologies based on available market
information. Options are carried at fair values based on the use of valuation
models that utilize, among other things, current interest or commodity rates and
foreign exchange and volatility rates, as applicable.
(m) SECURITIES PURCHASED (SOLD) UNDER AGREEMENTS TO RESELL (REPURCHASE), AT
CONTRACT VALUE: Purchases of securities under agreements to resell and sales of
securities under agreements to repurchase are accounted for as collateralized
lending transactions and are recorded at their contracted resale or repurchase
amounts, plus accrued interest. Generally, it is AIG's policy to take possession
of or obtain a security interest in securities purchased under agreements to
resell.
AIG minimizes the credit risk that counterparties to transactions might be
unable to fulfill their contractual obligations by monitoring customer credit
exposure and collateral value and generally requiring additional collateral to
be deposited with AIG when deemed necessary.
AIG also enters into dollar roll agreements. These are agreements to sell
mortgage-backed securities and to repurchase substantially the same securities
at a specified price and date in the future. The dollar rolls are accounted for
as collateralized financings and the repurchase obligation is a component of
other liabilities. At December 31, 2000, 1999 and 1998, there were no dollar
rolls outstanding.
(n) OTHER INVESTED ASSETS: Other invested assets consist primarily of
investments by AIG's insurance operations in joint ventures and partnerships and
other investments not classified elsewhere herein. The joint ventures and
partnerships are carried at equity or cost depending on the nature of the
invested asset. Other investments are carried at cost or market values depending
upon the nature of the underlying assets. Unrealized gains and losses from the
revaluation of those investments carried at market values are reflected in
comprehensive income, net of any related deferred income taxes or realized
capital gains or losses depending on the nature of the invested asset.
(o) REINSURANCE ASSETS: Reinsurance assets include the balances due from
both reinsurance and insurance companies under the terms of AIG's reinsurance
agreements for paid and unpaid losses and loss expenses, ceded unearned premiums
and ceded future policy benefits for life and accident and health insurance
contracts and benefits paid and unpaid. It also includes funds held under
reinsurance treaties. Amounts related to paid and unpaid losses and loss
expenses with respect to these reinsurance agreements are substantially
collateralized.
(p) INVESTMENTS IN PARTIALLY-OWNED COMPANIES: The equity method of
accounting is used for AIG's investment in
38
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American International Group, Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
companies in which AIG's ownership interest approximates twenty but is not
greater than fifty percent (minority-owned companies). In years prior to 1999,
equity in income of minority-owned insurance operations was presented separately
in the consolidated statement of income. In 2000 and 1999, AIG did not report
equity in income of minority-owned insurance operations as a result of the
consolidation of the operations of Transatlantic and SELIC Holdings, Ltd. into
general insurance operating results. IPC Holdings, Ltd., the remaining operation
included in equity in income of minority-owned insurance operations in previous
periods is now reported as a component of other income (deductions) -- net.
Equity in net income of other unconsolidated companies is principally included
in other income (deductions) -- net. At December 31, 2000, AIG's significant
investments in partially-owned companies included its 24.4 percent interest in
IPC Holdings, Ltd. This balance sheet caption also includes investments in less
significant partially-owned companies and in certain minor majority-owned
subsidiaries. The amounts of dividends received from unconsolidated entities
owned less than 50 percent were $3 million, $13 million and $24 million in 2000,
1999 and 1998 respectively. The undistributed earnings of unconsolidated
entities owned less than 50 percent was $58 million as of December 31, 2000.
(q) REAL ESTATE AND OTHER FIXED ASSETS: The costs of buildings and
furniture and equipment are depreciated principally on a straight-line basis
over their estimated useful lives (maximum of 40 years for buildings and 10
years for furniture and equipment). Expenditures for maintenance and repairs are
charged to income as incurred; expenditures for betterments are capitalized and
depreciated.
From time to time, AIG assesses the carrying value of its real estate
relative to the market values of real estate within the specific local area. At
December 31, 2000, there were no impairments.
(r) SEPARATE AND VARIABLE ACCOUNTS: Separate and variable accounts
represent funds for which investment income and investment gains and losses
accrue directly to the policyholders who predominantly bear the investment risk.
Each account has specific investment objectives, and the assets are carried at
market value. The assets of each account are legally segregated and are not
subject to claims which arise out of any other business of AIG. The liabilities
for these accounts are equal to the account assets.
(s) SECURITIES AND SPOT COMMODITIES SOLD BUT NOT YET PURCHASED, AT MARKET
VALUE: Securities and spot commodities sold but not yet purchased represent
sales of securities and spot commodities not owned at the time of sale. The
obligations arising from such transactions are recorded on a trade date basis
and carried at the respective current market values or current commodity prices.
Unrealized gains or losses are reflected in income currently.
(t) PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY COMPANIES: Preferred
shareholders' equity in subsidiary companies relates to outstanding preferred
stock or interest of ILFC and certain subsidiaries of SunAmerica, AGC and HSB,
wholly owned subsidiaries of AIG. Cash distributions on such preferred stock or
interest are accounted for as interest expense and included as minority interest
in the consolidated statement of income.
(u) TRANSLATION OF FOREIGN CURRENCIES: Financial statement accounts
expressed in foreign currencies are translated into U.S. dollars in accordance
with Statement of Financial Accounting Standards No. 52 "Foreign Currency
Translation" (FASB 52). Under FASB 52, functional currency assets and
liabilities are translated into U.S. dollars generally using current rates of
exchange prevailing at the balance sheet date of each respective subsidiary and
the related translation adjustments are recorded as a separate component of
comprehensive income, net of any related taxes in capital funds. Functional
currencies are generally the currencies of the local operating environment.
Income statement accounts expressed in functional currencies are translated
using average exchange rates. The adjustments resulting from translation of
financial statements of foreign entities operating in highly inflationary
economies are recorded in income. Exchange gains and losses resulting from
foreign currency transactions are also recorded in income currently. The
exchange gain or loss with respect to utilization of foreign exchange hedging
instruments is recorded as a component of comprehensive income.
(v) INCOME TAXES: Deferred federal and foreign income taxes are provided
for temporary differences for the expected future tax consequences of events
that have been recognized in AIG's financial statements or tax returns.
A valuation allowance with respect to deferred tax assets is provided for
when, in the opinion of management, it is more likely than not that some portion
of a deferred tax asset will not be realized. The changes in the allowance
account are recognized in operations or comprehensive income depending upon the
nature of the deferred tax asset
(w) EARNINGS PER SHARE: Basic earnings per common share are based on the
weighted average number of common shares outstanding, retroactively adjusted to
reflect all stock dividends and stock splits. Diluted earnings per share are
based on those shares used in basic earnings per share plus shares that would
have been outstanding assuming issuance of common shares for all dilutive
potential common shares outstanding, retroactively adjusted to reflect all stock
dividends and stock splits.
39
41
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The computation of earnings per share for December 31, 2000, 1999 and 1998
was as follows:
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
----------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2000 1999 1998
----------------------------------------------------------------
NUMERATOR FOR BASIC EARNINGS PER
SHARE:
Net income $6,639 $6,186 $5,046
Less:
Dividends on convertible preferred
stock -- (6) (18)
----------------------------------------------------------------
Net income applicable to common stock $6,639 $6,180 $5,028
----------------------------------------------------------------
DENOMINATOR FOR BASIC EARNINGS PER
SHARE:
Average shares outstanding used in the
computation of per share earnings:
Common stock issued 2,796 2,808 2,757
Common stock in treasury (189) (197) (185)
Common stock contingently issuable -- -- (4)
----------------------------------------------------------------
Average shares outstanding -- basic 2,607 2,611 2,568
----------------------------------------------------------------
NUMERATOR FOR DILUTED EARNINGS PER
SHARE:
Net income $6,639 $6,186 $5,046
Dividends on convertible preferred
securities 5 11 11
----------------------------------------------------------------
Net income applicable to common stock $6,644 $6,197 $5,057
----------------------------------------------------------------
DENOMINATOR FOR DILUTED EARNINGS PER
SHARE:
Average shares outstanding 2,607 2,611 2,572
Incremental shares from potential
common stock:
Average number of shares arising
from outstanding employee stock
plans (treasury stock method) 27 29 25
Average number of shares issuable
upon conversion of convertible
securities and preferred stock 4 10 37
----------------------------------------------------------------
Average shares outstanding -- diluted 2,638 2,650 2,634
----------------------------------------------------------------
EARNINGS PER SHARE:
Basic $ 2.55 $ 2.37 $ 1.96
Diluted 2.52 2.34 1.92
----------------------------------------------------------------
(x) ACCOUNTING STANDARDS: In June 1998, FASB issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" (FASB 133). In June 2000, FASB issued Statement of Financial
Accounting Standards No. 138 "Accounting for Derivative Instruments and Hedging
Activities-an amendment of FASB Statement No. 133" (FASB 138).
Together, these Statements require AIG to recognize all derivatives in the
consolidated balance sheet at fair value. The financial statement recognition of
the change in the fair value of a derivative depends on a number of factors,
including the intended use of the derivative and the extent to which it is
effective as part of a hedge transaction. Due to the operating nature of AIGFP
and AIGTG, the changes in fair value of their derivative transactions are
currently presented, in all material respects, as a component of AIG's operating
income. FASB 133 and FASB 138 are effective for AIG for the year commencing
January 1, 2001. The impact of the adoption of FASB 133 and FASB 138 at January
1, 2001 with respect to AIG's results of operations, financial condition and
liquidity is deemed insignificant.
2. FOREIGN OPERATIONS
Certain subsidiaries operate solely outside of the United States. Their assets
and liabilities are located principally in the countries where the insurance
risks are written and/or investment and non-insurance related operations are
located. In addition, certain of AIG's domestic subsidiaries have branch and/or
subsidiary operations and substantial assets and liabilities in foreign
countries. Certain countries have restrictions on the conversions of funds which
generally cause a delay in the outward remittance of such funds. Approximately
23 percent of consolidated assets at December 31, 2000 and 1999 and 40 percent,
39 percent and 38 percent of revenues for the years ended December 31, 2000,
1999 and 1998, respectively, were located in or derived from foreign countries
(other than Canada). (See Note 18.)
3. FEDERAL INCOME TAXES
(a) AIG and its domestic subsidiaries (excluding AGC and its subsidiaries)
file a consolidated U.S. Federal income tax return. Revenue Agent's Reports
assessing additional taxes for the years 1987, 1988, 1989 and 1990 have been
issued and Letters of Protest contesting the assessments have been filed with
the Internal Revenue Service (IRS). In addition, Revenue Agent's Reports
assessing additional taxes for the years ended September 30, 1993 and 1994 have
been issued to SunAmerica. Such assessments relate to years prior to the
acquisition of SunAmerica by AIG. Letters of Protest contesting the assessments
have been filed with the Internal Revenue Service. Issues regarding SunAmerica's
tax years ending November 30, 1988 and September 30, 1989, 1990, 1991 and 1992
have recently been agreed to with the Internal Revenue Service. It is
management's belief that there are substantial arguments in support of the
positions taken by AIG and SunAmerica in their Letters of Protest. AIG also
believes that the impact of the results of these examinations will not be
significant to AIG's financial condition, results of operations or liquidity.
AGC and the majority of its subsidiaries file a consolidated U.S. federal
income tax return. The IRS has completed examinations of AGC's tax returns
through 1992 and finalized all issues with respect to AGC's tax returns through
1992. Such issues were immaterial to AIG's financial condition, results of
operations and liquidity.
The IRS is currently examining AGC's tax returns for 1993 through 1999.
Although the final outcome of any issues raised is uncertain, AIG believes that
the ultimate liability, including interest, will be immaterial to AIG's results
of operations, financial condition and liquidity.
A component of life insurance surplus accumulated prior to 1984 is not
taxable unless it exceeds certain statutory limitations or is distributed to
shareholders. This surplus, accumulated in
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American International Group, Inc. and Subsidiaries
3. FEDERAL INCOME TAXES (continued)
policyholder surplus accounts, totaled approximately $1 billion at December 31,
2000. AIG has not made any provision in the accompanying financial statements
for taxation of this amount as management has no intention of making any
distributions from this surplus.
Foreign income not expected to be taxed in the United States has arisen
because AIG's foreign subsidiaries were generally not subject to U.S. income
taxes on income earned prior to January 1, 1987. Such income would become
subject to U.S. income taxes at current tax rates if remitted to the United
States or if other events occur which would make these amounts currently
taxable. The cumulative amount of translated undistributed earnings of AIG's
foreign subsidiaries currently not subject to U.S. income taxes was
approximately $3.5 billion at December 31, 2000. Management presently has not
subjected and has no intention of subjecting these accumulated earnings to
material U.S. income taxes and no provision has been made in the accompanying
financial statements for such taxes.
(b) The U.S. Federal income tax rate is 35 percent for 2000, 1999 and 1998.
Actual tax expense on income differs from the "expected" amount computed by
applying the Federal income tax rate because of the following:
(DOLLARS IN MILLIONS)
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------- -------------------------- --------------------------
PERCENT PERCENT PERCENT
OF PRE-TAX OF PRE-TAX OF PRE-TAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
---------------------------------------------------------------------------------------------------------------------------------
"Expected" tax expense $ 3,508 35.0% $ 3,289 35.0% $ 2,654 35.0%
Adjustments:
Tax exempt interest (294) (2.9) (299) (3.2) (310) (4.1)
Dividends received deduction (50) (0.5) (38) (0.4) (30) (0.4)
State income taxes 52 0.5 55 0.6 47 0.6
Foreign income not expected to be taxed
in the U.S., less foreign income taxes (110) (1.1) (81) (0.9) (85) (1.1)
Affordable housing tax credits (48) (0.5) (55) (0.6) (39) (0.5)
Other (87) (0.9) (38) (0.4) (47) (0.6)
---------------------------------------------------------------------------------------------------------------------------------
Actual tax expense $ 2,971 29.6% $ 2,833 30.1% $ 2,190 28.9%
---------------------------------------------------------------------------------------------------------------------------------
Foreign and domestic components of actual
tax expense:
Foreign:
Current $ 450 $ 403 $ 386
Deferred 131 123 31
Domestic*:
Current 1,244 1,748 1,138
Deferred 1,146 559 635
---------------------------------------------------------------------------------------------------------------------------------
Total $ 2,971 $ 2,833 $ 2,190
---------------------------------------------------------------------------------------------------------------------------------
* Including U.S. tax on foreign income.
41
43
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3. FEDERAL INCOME TAXES (continued)
(c) The components of the net deferred tax liability as of December 31,
2000 and December 31, 1999 were as follows:
(IN MILLIONS)
------------------------------------------------------------------
2000 1999
------------------------------------------------------------
Deferred tax assets:
Loss reserve discount $1,311 $1,357
Unearned premium reserve reduction 401 380
Accruals not currently deductible 458 466
Adjustment to life policy reserves 2,089 2,124
Cumulative translation adjustment 225 137
Litigation settlements 101 66
Unrealized depreciation of investments 54 298
Other 461 823
------------------------------------------------------------
5,100 5,651
Valuation allowance 187 448
------------------------------------------------------------
4,913 5,203
------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs 4,501 4,006
Financial service products mark to
market differential 599 454
Depreciation of flight equipment 1,504 1,210
Acquisition net asset basis adjustments 27 63
Other 1,314 1,040
------------------------------------------------------------
7,945 6,773
------------------------------------------------------------
Net deferred tax liability $3,032 $1,570
------------------------------------------------------------
Valuation allowances of $130 million and $381 million in 2000 and 1999,
respectively, were established with respect to the unrealized depreciation of
investments. These valuation allowances had no income statement impact.
The remaining deferred tax asset valuation allowance at year-end 2000 and
1999 was related to Federal and state income tax operating loss carryovers that
AGC did not expect to utilize. At December 31, 2000, AGC had operating loss
carryovers for Federal income tax purposes of $57 million, which are available
to offset its future taxable income through 2012. The operating loss carryovers
are predominantly associated with acquired companies; therefore, these operating
loss carryovers are subject to certain limitations.
4. DEFERRED POLICY ACQUISITION COSTS
The following reflects the policy acquisition costs deferred for amortization
against future income and the related amortization charged to income for general
and life insurance operations, excluding certain amounts deferred and amortized
in the same period:
(IN MILLIONS)
------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------------------------------------
General insurance operations:
Balance at beginning of year $ 2,132 $ 1,852 $ 1,637
-------------------------------------------------------------
Acquisition costs deferred
Commissions 876 799 664
Other 1,138 1,009 909
-------------------------------------------------------------
2,014 1,808 1,573
-------------------------------------------------------------
Amortization charged to income
Commissions 748 642 568
Other 960 886 790
-------------------------------------------------------------
1,708 1,528 1,358
-------------------------------------------------------------
Balance at end of year $ 2,438 $ 2,132 $ 1,852
-------------------------------------------------------------
Life insurance operations:
Balance at beginning of year $13,642 $10,438 $ 8,913
-------------------------------------------------------------
Acquisition costs deferred
Commissions 1,937 1,851 1,475
Other 828 1,304 731
-------------------------------------------------------------
2,765 3,155 2,206
-------------------------------------------------------------
Amortization charged to income
Commissions 1,305 1,273 1,211
Other* 498 (1,187) (370)
-------------------------------------------------------------
1,803 86 841
-------------------------------------------------------------
Increase (decrease) due to
foreign exchange (395) 135 160
-------------------------------------------------------------
Balance at end of year $14,209 $13,642 $10,438
-------------------------------------------------------------
Total deferred policy
acquisition costs $16,647 $15,774 $12,290
-------------------------------------------------------------
* Includes adjustments as a result of changes in the net unrealized gains or
losses on debt and equity securities available for sale. Such adjustments were
included with the change in net unrealized gains/losses on debt and equity
securities available for sale that were credited or charged directly to
comprehensive income.
5. REINSURANCE
In the ordinary course of business, AIG's general and life insurance companies
cede reinsurance to other insurance companies in order to provide greater
diversification of AIG's business and limit the potential for losses arising
from large risks.
General reinsurance is effected under reinsurance treaties and by
negotiation on individual risks. Certain of these reinsurance arrangements
consist of excess of loss contracts which protect AIG against losses over
stipulated amounts. Ceded premiums are considered prepaid reinsurance premiums
and are amortized into income over the contract period in proportion to the
protection received. Amounts recoverable from general reinsurers are estimated
in a manner consistent with the claims liabilities associated with the
reinsurance and presented as a component of reinsurance assets.
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American International Group, Inc. and Subsidiaries
5. REINSURANCE (continued)
AIG life companies limit exposure to loss on any single life. For ordinary
insurance, AIG retains a maximum of approximately one million dollars of
coverage per individual life with respect to AIG's overseas life operations and
$2.5 million of coverage per individual life with respect to AIG's domestic life
operations. There are smaller retentions for other lines of business. Life
reinsurance is effected principally under yearly renewable term treaties. The
premiums with respect to these treaties are considered prepaid reinsurance
premiums and are amortized into income over the contract period in proportion to
the protection provided. Amounts recoverable from life reinsurers are estimated
in a manner consistent with the assumptions used for the underlying policy
benefits and are presented as a component of reinsurance assets.
General insurance premiums written and earned were comprised of the
following:
(IN MILLIONS)
------------------------------------------------------------------
YEARS ENDED DECEMBER 31, WRITTEN EARNED
------------------------------------------------------------
2000
Gross premiums $25,050 $24,062
Ceded premiums (7,524) (6,655)
------------------------------------------------------------
Net premiums $17,526 $17,407
------------------------------------------------------------
1999
Gross premiums $22,569 $21,187
Ceded premiums (6,345) (5,643)
------------------------------------------------------------
Net premiums $16,224 $15,544
------------------------------------------------------------
1998
Gross premiums $20,684 $20,092
Ceded premiums (6,098) (5,994)
------------------------------------------------------------
Net premiums $14,586 $14,098
------------------------------------------------------------
For the years ended December 31, 2000, 1999 and 1998, reinsurance
recoveries, which reduced loss and loss expenses incurred, amounted to $6.00
billion, $5.13 billion and $5.36 billion, respectively.
Life insurance net premium income was comprised of the following:
(IN MILLIONS)
------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------------------------------------
Gross premium income $17,935 $16,356 $14,459
Ceded premiums (762) (876) (734)
-------------------------------------------------------------
Net premium income $17,173 $15,480 $13,725
-------------------------------------------------------------
Life insurance recoveries, which reduced death and other benefits,
approximated $331 million, $512 million and $420 million, respectively, for the
years ended December 31, 2000, 1999 and 1998.
AIG's reinsurance arrangements do not relieve AIG from its direct
obligation to its insureds. Thus, a credit exposure exists with respect to both
general and life reinsurance ceded to the extent that any reinsurer is unable to
meet the obligations assumed under the reinsurance agreements. AIG holds
substantial collateral as security under related reinsurance agreements in the
form of funds, securities and/or letters of credit. A provision has been
recorded for estimated unrecoverable reinsurance. AIG has been largely
successful in prior recovery efforts.
AIG evaluates the financial condition of its reinsurers through an internal
reinsurance security committee consisting of members of AIG's senior management.
No single reinsurer is a material reinsurer to AIG nor is AIG's business
substantially dependent upon any reinsurance contract.
Life insurance ceded to other insurance companies was as follows:
(IN MILLIONS)
------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------------------------------------
Life insurance in-force $185,705 $163,982 $128,777
-------------------------------------------------------------
Life insurance assumed represented 0.2 percent of gross life insurance
in-force at December 31, 2000, 0.4 percent for 1999 and 1998 and life insurance
premium income assumed represented 0.4 percent, 1.9 percent and 2.2 percent of
gross premium income for the periods ended December 31, 2000, 1999 and 1998.
Supplemental information for gross loss and benefit reserves net of ceded
reinsurance at December 31, 2000 and 1999 follows:
(IN MILLIONS)
------------------------------------------------------------------
AS NET OF
REPORTED REINSURANCE
------------------------------------------------------------
2000
Reserve for losses and loss
expenses $(40,613) $(24,952)
Future policy benefits for life and
accident and health insurance
contracts (51,532) (50,464)
Premiums and insurance balances
receivable -- net 11,832 15,164
Funds held under reinsurance
treaties -- 578
Reserve for unearned premiums (12,510) (9,185)
Reinsurance assets 23,964 --
------------------------------------------------------------
1999
Reserve for losses and loss
expenses $(38,252) $(24,600)
Future policy benefits for life and
accident and health insurance
contracts (47,759) (46,676)
Premiums and insurance balances
receivable -- net 12,236 14,776
Funds held under reinsurance
treaties -- 484
Reserve for unearned premiums (11,450) (8,994)
Reinsurance assets 20,215 --
------------------------------------------------------------
43
45
--------------------------------------------------------------------------------
6. RESERVE FOR LOSSES AND LOSS EXPENSES AND FUTURE LIFE POLICY BENEFITS AND
POLICYHOLDERS' CONTRACT DEPOSITS
(a) The following analysis provides a reconciliation of the activity in the
reserve for losses and loss expenses:
(IN MILLIONS)
------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------------------------------------
At beginning of year:
Reserve for losses and
loss expenses $ 38,252 $ 38,310 $ 33,400
Reinsurance recoverable (13,652) (13,691) (12,229)
-------------------------------------------------------------
24,600 24,619 21,171
-------------------------------------------------------------
Acquisitions 236 -- 2,896
-------------------------------------------------------------
Losses and loss expenses
incurred:
Current year 13,356 12,122 10,938
Prior years (252) (384) (281)
-------------------------------------------------------------
Total 13,104 11,738 10,657
-------------------------------------------------------------
Losses and loss expenses
paid:
Current year 5,205 4,978 4,389
Prior years 7,783 6,779 5,716
-------------------------------------------------------------
Total 12,988 11,757 10,105
-------------------------------------------------------------
At end of year:
Net reserve for losses
and loss expenses 24,952 24,600 24,619
Reinsurance recoverable 15,661 13,652 13,691
-------------------------------------------------------------
Total $ 40,613 $ 38,252 $ 38,310
-------------------------------------------------------------
(b) The analysis of the future policy benefits and policyholders' contract
deposits liabilities as at December 31, 2000 and 1999 follows:
(IN MILLIONS)
------------------------------------------------------------------
2000 1999
------------------------------------------------------------
Future policy benefits:
Long duration contracts $49,304 $45,288
Short duration contracts 2,228 2,471
------------------------------------------------------------
Total $51,532 $47,759
------------------------------------------------------------
Policyholders' contract deposits:
Annuities $60,446 $61,073
Guaranteed investment contracts (GICs) 25,344 18,905
Corporate life products 2,175 2,122
Universal life 10,455 10,019
Other investment contracts 907 764
------------------------------------------------------------
Total $99,327 $92,883
------------------------------------------------------------
(c) Long duration contract liabilities included in future policy benefits,
as presented in the table above, result from traditional life products. Short
duration contract liabilities are primarily accident and health products. The
liability for future life policy benefits has been established based upon the
following assumptions:
(i) Interest rates (exclusive of immediate/terminal funding annuities),
which vary by territory, year of issuance and products, range from 1.5 percent
to 12.0 percent within the first 20 years. Interest rates on immediate/terminal
funding annuities are at a maximum of 12.2 percent and grade to not greater than
7.5 percent.
(ii) Mortality and surrender rates are based upon actual experience by
geographical area modified to allow for variations in policy form. The weighted
average lapse rate, including surrenders, for individual and group life
approximated 7.5 percent.
(iii) The portions of current and prior net income and of current
unrealized appreciation of investments that can inure to the benefit of AIG are
restricted in some cases by the insurance contracts and by the local insurance
regulations of the countries in which the policies are in force.
(iv) Participating life business represented approximately 22 percent of
the gross insurance in-force at December 31, 2000 and 35 percent of gross
premium income in 2000. The amount of annual dividends to be paid is determined
locally by the Boards of Directors. Provisions for future dividend payments are
computed by jurisdiction, reflecting local regulations.
(d) The liability for policyholders' contract deposits has been established
based on the following assumptions:
(i) Interest rates credited on deferred annuities, which vary by territory
and year of issuance, range from 2.0 percent to 9.0 percent. Current declared
interest rates are generally guaranteed to remain in effect for a period of one
year though some are guaranteed for longer periods. Withdrawal charges generally
range from zero percent to 10.0 percent grading to zero over a period of zero to
10 years.
(ii) Domestically, GICs have market value withdrawal provisions for any
funds withdrawn other than benefit responsive payments. Interest rates credited
generally range from 4.0 percent to 9.4 percent. The vast majority of these GICs
mature within 10 years. Overseas, interest rates credited on GICs generally
range from 4.8 percent to 7.3 percent and maturities range from 1 to 6 years.
(iii) Interest rates on corporate life insurance products are guaranteed at
4.0 percent and the weighted average rate credited in 2000 was 6.8 percent.
(iv) The universal life funds have credited interest rates of 4.0 percent
to 7.5 percent and guarantees ranging from 3.0 percent to 5.5 percent depending
on the year of issue. Additionally, universal life funds are subject to
surrender charges that amount to 14.0 percent of the aggregate fund balance
grading to zero over a period not longer than 20 years.
(e) Certain products, which are short duration contracts, are subject to
experience adjustments. These include group life and group medical products,
credit life contracts, accident & health insurance contracts/riders attached to
life policies and, to a limited extent, reinsurance agreements with other direct
insurers. Ultimate premiums from these contracts are estimated and recognized as
revenue and the unearned portions of the premiums are held as reserves.
Experience adjustments vary according to the type of
44
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--------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
6. RESERVE FOR LOSSES AND LOSS EXPENSES AND FUTURE LIFE POLICY BENEFITS AND
POLICYHOLDERS' CONTRACT DEPOSITS (continued)
contract and the territory in which the policy is in force and are subject to
local regulatory guidance.
7. STATUTORY FINANCIAL DATA
Statutory surplus and net income for general insurance and life insurance
operations as reported to regulatory authorities were as follows:
(IN MILLIONS)
------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------------------------------------
Statutory surplus:
General insurance $16,934 $16,225 $15,523
Life insurance 16,849 14,312 12,034
Statutory net income*:
General insurance 2,508 2,458 2,252
Life insurance 2,314 2,427 1,685
-------------------------------------------------------------
* Includes net realized capital gains and losses.
AIG's insurance subsidiaries file financial statements prepared in
accordance with statutory accounting practices prescribed or permitted by
domestic or foreign insurance regulatory authorities. The differences between
statutory financial statements and financial statements prepared in accordance
with GAAP vary between domestic and foreign jurisdictions. The principal
differences are that statutory financial statements do not reflect deferred
policy acquisition costs and deferred income taxes, all bonds are carried at
amortized cost and reinsurance assets and liabilities are presented net of
reinsurance. AIG's use of permitted statutory accounting practices does not have
a significant impact on statutory surplus.
8. INVESTMENT INFORMATION
(a) STATUTORY DEPOSITS: Cash and securities with carrying values of $5.63
billion and $4.60 billion were deposited by AIG's subsidiaries under
requirements of regulatory authorities as of December 31, 2000 and 1999,
respectively.
(b) NET INVESTMENT INCOME: An analysis of the net investment income from
the general and life insurance operations follows:
(IN MILLIONS)
-------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------------------------------------
General insurance:
Fixed maturities $ 1,815 $1,852 $1,663
Equity securities 214 101 80
Short-term investments 70 52 73
Other invested assets 556 399 202
Miscellaneous (net of interest
expense on funds held) 189 256 279
-------------------------------------------------------------
Total investment income 2,844 2,660 2,297
Investment expenses 143 143 105
-------------------------------------------------------------
Net investment income $ 2,701 $2,517 $2,192
-------------------------------------------------------------
Life insurance:
Fixed maturities $ 8,253 $7,369 $6,468
Equity securities 112 103 86
Short-term investments 332 395 366
Interest on mortgage, policy
and collateral loans 1,075 1,009 1,030
Other 1,191 920 755
-------------------------------------------------------------
Total investment income 10,963 9,796 8,705
Investment expenses 299 291 348
-------------------------------------------------------------
Net investment income $10,664 $9,505 $8,357
-------------------------------------------------------------
(c) INVESTMENT GAINS AND LOSSES: The realized capital gains (losses) and
increase (decrease) in unrealized appreciation of investments were as follows:
(IN MILLIONS)
-------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------------------------------------
Realized capital gains (losses)
on investments:
Fixed maturities(a) $ (622) $ (207) $ 48
Equity securities 340 416 113
Other (32) (106) (31)
-------------------------------------------------------------
Realized capital gains (losses) $ (314) $ 103 $ 130
-------------------------------------------------------------
Increase (decrease) in
unrealized appreciation of
investments:
Fixed maturities $2,782 $(8,903) $ 1,288
Equity securities (897) 330 (470)
Other(b) (560) 3,155 (775)
-------------------------------------------------------------
Increase (decrease) in
unrealized appreciation $1,325 $(5,418) $ 43
-------------------------------------------------------------
(a) The realized gains (losses) resulted from the disposition of available for
sale fixed maturities.
(b) Includes $51 million increase, $264 million decrease and $301 million
increase in unrealized appreciation attributable to participating
policyholders at December 31, 2000, 1999 and 1998, respectively.
45
47
--------------------------------------------------------------------------------
8. INVESTMENT INFORMATION (continued)
The gross gains and gross losses realized on the disposition of available
for sale securities were as follows:
(IN MILLIONS)
-------------------------------------------------------------
GROSS GROSS
REALIZED REALIZED
GAINS LOSSES
-------------------------------------------------------------
2000
Bonds $ 393 $1,001
Common stocks 791 397
Preferred stocks 47 27
Financial services securities available
for sale 8 --
-------------------------------------------------------------
Total $1,239 $1,425
-------------------------------------------------------------
1999
Bonds $ 448 $ 668
Common stocks 812 336
Preferred stocks 36 12
Financial services securities available
for sale 26 --
-------------------------------------------------------------
Total $1,322 $1,016
-------------------------------------------------------------
1998
Bonds $ 566 $ 500
Common stocks 550 454
Preferred stocks 12 11
Financial services securities available
for sale 4 2
-------------------------------------------------------------
Total $1,132 $ 967
-------------------------------------------------------------
(d) MARKET VALUE OF FIXED MATURITIES AND UNREALIZED APPRECIATION OF
INVESTMENTS: At December 31, 2000 and 1999, the balance of the unrealized
appreciation of investments in equity securities (before applicable taxes)
included gross gains of approximately $687 million and $1.3 billion and gross
losses of approximately $1 billion and $713 million, respectively.
The deferred tax asset related to the net unrealized depreciation of
investments was $54 million at December 31, 2000 and the deferred tax asset
related to the net unrealized depreciation of investments was $298 million at
December 31, 1999.
The amortized cost and estimated market value of investments in fixed
maturities carried at amortized cost at December 31, 2000 and 1999 were as
follows:
(IN MILLIONS)
-----------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-----------------------------------------------------------------------
2000
Fixed maturities held
to maturity:
Bonds:
U.S.
Government(a) $ 67 $ 3 $ -- $ 70
States(b) 11,461 523 6 11,978
Other 5 -- -- 5
-----------------------------------------------------------------------
Total fixed
maturities $11,533 $ 526 $ 6 $12,053
-----------------------------------------------------------------------
1999
Fixed maturities held
to maturity:
Bonds:
U.S.
Government(a) $ 30 $ -- $ -- $ 30
States(b) 12,042 275 149 12,168
Other 4 -- -- 4
-----------------------------------------------------------------------
Total bonds 12,076 275 149 12,202
Preferred stocks 2 -- 2 --
-----------------------------------------------------------------------
Total fixed
maturities $12,078 $ 275 $151 $12,202
-----------------------------------------------------------------------
(a) Including U.S. Government agencies and authorities.
(b) Including municipalities and political subdivisions.
46
48
--------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
8. INVESTMENT INFORMATION (continued)
The amortized cost and estimated market value of bonds available for sale
and carried at market value at December 31, 2000 and 1999 were as follows:
(IN MILLIONS)
-----------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-----------------------------------------------------------------------
2000
Fixed maturities
available for sale:
Bonds:
U.S.
Government(a) $ 2,417 $ 146 $ 24 $ 2,539
States(b) 10,841 454 108 11,187
Foreign
governments 18,274 919 212 18,981
All other
corporate 122,389 2,775 4,108 121,056
-----------------------------------------------------------------------
Total bonds $153,921 $4,294 $4,452 $153,763
-----------------------------------------------------------------------
1999
Fixed maturities
available for sale:
Bonds:
U.S.
Government(a) $ 3,131 $ 94 $ 85 $ 3,140
States(b) 10,279 155 407 10,027
Foreign
governments 15,342 475 91 15,726
All other
corporate 111,841 1,292 4,373 108,760
-----------------------------------------------------------------------
Total bonds $140,593 $2,016 $4,956 $137,653
-----------------------------------------------------------------------
(a) Including U.S. Government agencies and authorities.
(b) Including municipalities and political subdivisions.
The amortized cost and estimated market values of fixed maturities held to
maturity and fixed maturities available for sale at December 31, 2000, by
contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because certain borrowers have the right to call or
prepay certain obligations with or without call or prepayment penalties.
(IN MILLIONS)
------------------------------------------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------------------------------------------------------
Fixed maturities held to maturity:
Due in one year or less $ 661 $ 687
Due after one year through five
years 2,066 2,151
Due after five years through ten
years 3,579 3,753
Due after ten years 5,227 5,462
------------------------------------------------------------
Total held to maturity $11,533 $12,053
------------------------------------------------------------
Fixed maturities available for sale:
Due in one year or less $ 6,806 $ 6,817
Due after one year through five
years 38,779 38,877
Due after five years through ten
years 46,021 45,328
Due after ten years 62,315 62,741
------------------------------------------------------------
Total available for sale $153,921 $153,763
------------------------------------------------------------
(e) SECURITIES AVAILABLE FOR SALE: AIGFP follows a policy of minimizing
interest rate, equity and currency risks associated with securities available
for sale by entering into swap or other transactions. In addition, to reduce its
credit risk, AIGFP has entered into credit derivative transactions with respect
to $182 million of securities available for sale. At December 31, 2000, the
cumulative increase in carrying value of the securities available for sale and
related hedges as a result of marking to market such securities net of hedging
transactions was $33 million.
The amortized cost, related hedges and estimated market value of securities
available for sale and carried at market value at December 31, 2000 and 1999
were as follows:
(IN MILLIONS)
----------------------------------------------------------------------------------------------------------------------------
UNREALIZED
GAINS
GROSS GROSS (LOSSES) -- NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED ON HEDGING MARKET
COST GAINS LOSSES TRANSACTIONS VALUE
----------------------------------------------------------------------------------------------------------------------------
2000
Securities available for sale:
Corporate and bank debt $ 8,140 $ 82 $275 $ 219 $ 8,166
Foreign government obligations 30 -- 21 20 29
Asset-backed and collateralized 4,946 113 77 (37) 4,945
Preferred stocks 1,328 9 4 5 1,338
U.S. Government obligations 192 4 4 (1) 191
----------------------------------------------------------------------------------------------------------------------------
Total $14,636 $208 $381 $ 206 $14,669
----------------------------------------------------------------------------------------------------------------------------
47
49
--------------------------------------------------------------------------------
8. INVESTMENT INFORMATION (continued)
(IN MILLIONS)
----------------------------------------------------------------------------------------------------------------------------
UNREALIZED
GAINS
GROSS GROSS (LOSSES) -- NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED ON HEDGING MARKET
COST GAINS LOSSES TRANSACTIONS VALUE
----------------------------------------------------------------------------------------------------------------------------
1999
Securities available for sale:
Corporate and bank debt $ 7,477 $ 54 $199 $ 167 $ 7,499
Foreign government obligations 354 311 1 (311) 353
Asset-backed and collateralized 3,985 6 165 163 3,989
Preferred stocks 957 13 -- (4) 966
U.S. Government obligations 147 4 7 3 147
----------------------------------------------------------------------------------------------------------------------------
Total $12,920 $388 $372 $ 18 $12,954
----------------------------------------------------------------------------------------------------------------------------
The amortized cost and estimated market values of securities available for
sale at December 31, 2000, by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because certain borrowers have
the right to call or prepay certain obligations with or without call or
prepayment penalties.
(IN MILLIONS)
------------------------------------------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------------------------------------------------------
Securities available for sale:
Due in one year or less $ 1,473 $ 1,478
Due after one year through five
years 5,096 5,122
Due after five years through ten
years 1,822 1,828
Due after ten years 1,299 1,296
Asset-backed and collateralized 4,946 4,945
------------------------------------------------------------
Total securities available for sale $14,636 $14,669
------------------------------------------------------------
No securities available for sale were below investment grade at December
31, 2000.
(f) FINANCE RECEIVABLES: Finance receivables, net of unearned finance
charges, were as follows:
(IN MILLIONS)
-------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------------------------------------
Real estate loans $ 7,280 $ 7,104 $5,757
Non-real estate loans 3,027 2,576 2,560
Retail sales finance 1,454 1,350 1,340
-------------------------------------------------------------
Total finance receivables 11,761 11,030 9,657
Allowance for losses (383) (396) (382)
-------------------------------------------------------------
Finance receivables, net $11,378 $10,634 $9,275
-------------------------------------------------------------
Activity in the allowance for finance receivable losses was as follows:
(IN MILLIONS)
-----------------------------------------------------------
YEARS ENDED DECEMBER 31, 2000 1999 1998
-----------------------------------------------------------
Balance at January 1 $ 396 $ 382 $ 373
Provision for finance receivable
losses 206 207 212
Charge offs, net of recoveries (206) (207) (220)
Acquired (sold) receivables (13) 14 17
-----------------------------------------------------------
Balance at December 31 $ 383 $ 396 $ 382
-----------------------------------------------------------
At December 31, 2000, contractual maturities of finance receivables were as
follows:
(IN MILLIONS)
----------------------------------------------------------------------
AFTER
2001 2002 2003 2004 2005 2005
----------------------------------------------------------------------
Maturities $1,331 $1,597 $1,179 $708 $437 $6,509
----------------------------------------------------------------------
Contractual maturities are not a forecast of future cash collections. A
substantial portion of finance receivables may be renewed, converted, or repaid
prior to maturity.
Cash collections of principal were as follows:
(DOLLARS IN MILLIONS)
-------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------------------------------------
Real estate loans
Cash collections $1,855 $1,886 $1,553
% of average balances 26% 30% 33%
Non-real estate loans
Cash collections $1,610 $1,519 $1,569
% of average balances 57% 61% 62%
Retail sales finance
Cash collections $1,849 $1,697 $1,653
% of average balances 132% 133% 127%
-------------------------------------------------------------
48
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--------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
The geographic concentration of finance receivables was as follows:
--------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2000 1999 1998
--------------------------------------------------------------
California 13% 14% 15%
North Carolina 7 7 8
Florida 6 6 6
Illinois 6 6 6
Ohio 6 6 6
Indiana 5 5 5
Other 57 56 54
--------------------------------------------------------------
Total finance receivables 100% 100% 100%
--------------------------------------------------------------
(g) CMOS: At December 31, 2000, CMOs, held by AIG's life companies, were
presented as a component of bonds available for sale, at market value.
Substantially all of the CMOs were investment grade and approximately 37 percent
of the CMOs were backed by various U.S. government agencies. The remaining 63
percent were corporate issuances.
The distribution of the CMOs at December 31, 2000 and 1999 was as follows:
(IN MILLIONS)
-----------------------------------------------------------
2000 1999
-----------------------------------------------------------
GNMA 5% 5%
FHLMC 17 20
FNMA 15 16
VA -- 1
Non-governmental 63 58
-----------------------------------------------------------
100% 100%
-----------------------------------------------------------
AIG is not exposed to any significant credit concentration risk of a single
or group non-governmental issuer.
At December 31, 2000, the gross weighted average coupon of this portfolio
was 6.88 percent. The gross weighted average life of this portfolio was
approximately 6.09 years.
At December 31, 2000 and 1999, the market value of the CMO portfolio was
$24.81 billion and $22.64 billion, respectively; the amortized cost was
approximately $24.48 billion in 2000 and $23.33 billion in 1999. AIG's CMO
portfolio is readily marketable. There were no derivative (high risk) CMO
securities contained in this portfolio at December 31, 2000 and 1999.
(h) FIXED MATURITIES BELOW INVESTMENT GRADE: At December 31, 2000, fixed
maturities held by AIG that were below investment grade or not rated totaled
$18.07 billion.
(i) At December 31, 2000, non-income producing invested assets were
insignificant.
9. DEBT OUTSTANDING
At December 31, 2000, AIG's debt outstanding of $54.32 billion, shown below,
included borrowings of $50.39 billion which were either not guaranteed by AIG or
were matched borrowings under obligations of guaranteed investment agreements
(GIAs) or matched notes and bonds payable.
(IN MILLIONS)
------------------------------------------------------------
Borrowings under obligations of GIAs -- AIGFP $13,595
------------------------------------------------------------
Commercial Paper:
AGC(a) 1,921
AGF(a) 5,162
Funding 968
ILFC(a) 4,259
AICCO 597
AIGF -- Taiwan(a) 104
AIGCCC -- Taiwan(a) 36
------------------------------------------------------------
Total 13,047
------------------------------------------------------------
Medium Term Notes:
AGF(a) 3,069
ILFC(a) 3,175
AIG 582
------------------------------------------------------------
Total 6,826
------------------------------------------------------------
Notes and Bonds Payable:
ILFC(a)(b) 5,529
AIGFP 8,755
AIG 720
AGC(a) 1,338
AGF(a) 2,602
------------------------------------------------------------
Total 18,944
------------------------------------------------------------
Loans and Mortgages Payable:
ILFC(a)(c) 463
AIG Finance (Hong Kong) Limited(a) 346
AIG Consumer Finance Group, Inc.(a) 662
AIG 440
------------------------------------------------------------
Total 1,911
------------------------------------------------------------
Total Borrowings 54,323
------------------------------------------------------------
Borrowings not guaranteed by AIG 28,666
Matched GIA borrowings 13,595
Matched notes and bonds payable -- AIGFP 8,127
------------------------------------------------------------
50,388
------------------------------------------------------------
Remaining borrowings of AIG $ 3,935
------------------------------------------------------------
(a) AIG does not guarantee or support these borrowings.
(b) Includes borrowings under Export Credit Facility of $2.07 billion.
(c) Capital lease obligations.
The amount of long-term borrowings is $38.07 billion and the amount of
short-term borrowings is $16.25 billion. Long-term borrowings include commercial
paper and short-term borrowings represent borrowings that mature in less than
one year.
49
51
--------------------------------------------------------------------------------
9. DEBT OUTSTANDING (continued)
(a) COMMERCIAL PAPER: At December 31, 2000, the commercial paper issued
and outstanding was as follows:
(DOLLARS IN MILLIONS)
--------------------------------------------------------------------------
WEIGHTED
NET AVERAGE WEIGHTED
BOOK UNAMORTIZED FACE INTEREST AVERAGE
VALUE DISCOUNT AMOUNT RATE MATURITY
--------------------------------------------------------------------------
Funding $ 968 $ 2 $ 970 6.50% 19 days
ILFC 4,259 30 4,289 6.63 111 days
AGF 5,162 22 5,184 6.68 29 days
AGC 1,921 8 1,929 6.68 32 days
AICCO 597 2 599 6.51 16 days
AIGF -- Taiwan* 104 2 106 6.04 177 days
AIGCCC -- Taiwan* 36 -- 36 5.87 161 days
--------------------------------------------------------------------------
Total $13,047 $66 $13,113 -- --
--------------------------------------------------------------------------
* Issued in Taiwan N.T. dollars at prevailing local interest rates.
Commercial paper issued by Funding is guaranteed by AIG. At December 31,
2000, AIG did not guarantee or support the commercial paper of any of its
subsidiaries other than Funding and AICCO. In early 2001, AICCO ceased issuing
commercial paper under its program and the agreement which AIG had provided
supporting the commercial paper was terminated; AICCO's funding requirements are
now met through Funding's program.
(b) BORROWINGS UNDER OBLIGATIONS OF GUARANTEED INVESTMENT
AGREEMENTS: Borrowings under obligations of guaranteed investment agreements,
which are guaranteed by AIG, are recorded at the amount outstanding under each
contract. Obligations may be called at various times prior to maturity at the
option of the counterparty. Interest rates on these borrowings are primarily
fixed, vary by maturity, and range up to 9.8 percent.
Payments due under these investment agreements in each of the next five
years ending December 31, and the periods thereafter based on the earliest call
dates, were as follows:
(IN MILLIONS)
-------------------------------------------------------------
PRINCIPAL
AMOUNT
-------------------------------------------------------------
2001 $6,061
2002 1,464
2003 280
2004 72
2005 106
Remaining years after 2005 5,612
-------------------------------------------------------------
Total $13,595
-------------------------------------------------------------
At December 31, 2000, the market value of securities pledged as collateral
with respect to these obligations approximated $3.8 billion.
Funds received from GIA borrowings are invested in a diversified portfolio
of securities and derivative transactions.
(c) MEDIUM TERM NOTES PAYABLE:
(i) Medium Term Notes Payable Issued by AIG: AIG's Medium Term Notes are
unsecured obligations which normally may not be redeemed by AIG prior to
maturity and bear interest at either fixed rates set by AIG at issuance or
variable rates determined by reference to an interest rate or other formula.
An analysis of AIG's Medium Term Notes for the year ended December 31, 2000
was as follows:
(IN MILLIONS)
-------------------------------------------------------------
AIG SUNAMERICA TOTAL
-------------------------------------------------------------
Balance December 31, 1999 $ 283 $198 $ 481
Issued during year 233 -- 233
Redeemed during year (130) (2) (132)
-------------------------------------------------------------
Balance December 31, 2000 $ 386 $196 $ 582
-------------------------------------------------------------
The interest rates on AIG's Medium Term Notes range from 0.50 percent to
7.15 percent. To the extent deemed appropriate, AIG may enter into swap
transactions to reduce its effective borrowing rates with respect to these
notes.
At December 31, 2000, Medium Term Notes issued by SunAmerica Inc. in the
aggregate principal amount of $196 million had maturity dates ranging from 2001
to 2026 at interest rates ranging from 6.03 percent to 7.34 percent.
During 1997, AIG issued $100 million principal amount of equity-linked
Medium Term Notes due July 30, 2004. These notes accrued interest at the rate of
2.25 percent and the total return on these notes was linked to the appreciation
in market value of AIG's common stock. In conjunction with the issuance of these
notes, AIG entered into a series of swap transactions which effectively
converted its interest expense to a fixed rate of 5.87 percent and transferred
the equity appreciation exposure to a third party. These notes were redeemed
during 2000.
During 2000, AIG issued $210 million principal amount of equity-linked
Medium Term Notes due May 15, 2007. These notes accrue interest at the rate of
0.50 percent and the total return on these notes is linked to the appreciation
in market value of AIG's common stock. The notes may be redeemed, at the option
of AIG, as a whole but not in part, at any time on or after May 15, 2003. In
conjunction with the issuance of these notes, AIG entered into a series of swap
transactions which effectively converted its interest expense to a fixed rate of
7.17 percent and transferred the equity appreciation exposure to a third party.
AIG is exposed to credit risk with respect to the counterparties to these swap
transactions.
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American International Group, Inc. and Subsidiaries
9. DEBT OUTSTANDING (continued)
At December 31, 2000, the maturity schedule for AIG's outstanding Medium
Term Notes, including those issued by SunAmerica Inc., was as follows:
(IN MILLIONS)
-------------------------------------------------------------
PRINCIPAL
AMOUNT
-------------------------------------------------------------
2001 $176
2002 48
2003 25
2004 20
2005 55
Remaining years after 2005 258
-------------------------------------------------------------
Total $582
-------------------------------------------------------------
At December 31, 2000, AIG had $781 million principal amount of debt
securities registered and available for issuance from time to time. In early
2001, AIG established a new Medium Term Note program under which these
securities may be issued.
(ii) Medium Term Notes Payable Issued by ILFC: ILFC's Medium Term Notes
are unsecured obligations which may not be redeemed by ILFC prior to maturity
and bear interest at fixed rates set by ILFC at issuance.
As of December 31, 2000, notes in aggregate principal amount of $3.18
billion were outstanding with maturity dates from 2001 to 2005 at interest rates
ranging from 5.20 percent to 8.55 percent. These notes provide for a single
principal payment at the maturity of each note.
At December 31, 2000, the maturity schedule for ILFC's outstanding Medium
Term Notes was as follows:
(IN MILLIONS)
------------------------------------------------------------
PRINCIPAL
AMOUNT
------------------------------------------------------------
2001 $ 1,217
2002 1,328
2003 485
2004 120
2005 25
------------------------------------------------------------
Total $ 3,175
------------------------------------------------------------
(iii) Medium Term Notes Payable Issued by AGF: As of December 31, 2000,
notes in aggregate principal amount of $3.07 billion were outstanding with
maturity dates ranging from 2001 to 2009 at interest rates ranging from 5.37
percent to 7.95 percent. To the extent deemed appropriate, AGF may enter into
swap transactions to reduce its effective borrowing rates with respect to these
notes.
At December 31, 2000, the maturity schedule for AGF's outstanding Medium
Term Notes was as follows:
(IN MILLIONS)
------------------------------------------------------------
PRINCIPAL
AMOUNT
------------------------------------------------------------
2001 $ 863
2002 1,038
2003 625
2004 176
2005 323
Remaining years after 2005 44
------------------------------------------------------------
Total $ 3,069
------------------------------------------------------------
(d) NOTES AND BONDS PAYABLE:
(i) Notes, Bonds and Debentures Issued by AIG.
(A) Zero Coupon Notes: On October 1, 1984, AIG issued Eurodollar zero
coupon notes in the aggregate principal amount at stated maturity of $750
million. The notes were offered at 12 percent of principal amount at stated
maturity, bear no interest and are due August 15, 2004. The net proceeds to AIG
from the issuance were $86 million. The notes are redeemable at any time in
whole or in part at the option of AIG at 100 percent of their principal amount
at stated maturity. The notes are also redeemable at the option of AIG or bearer
notes may be redeemed at the option of the holder in the event of certain
changes involving taxation in the United States at prices ranging from 65.26
percent currently, to 89.88 percent after August 15, 2003, of the principal
amount at stated maturity together with accrued amortization of original issue
discount from the preceding August 15. During 2000 and 1999, no notes were
repurchased. At December 31, 2000, the notes outstanding after prior purchases
had a face value of $189 million, an unamortized discount of $62 million and a
net book value of $127 million. The amortization of the original issue discount
was recorded as interest expense.
(B) Italian Lire Bonds: In December, 1991, AIG issued unsecured bonds
denominated in Italian Lire. The principal amount of 200 billion Italian Lire
Bonds matures December 4, 2001 and accrues interest at a rate of 11.7 percent
which is paid annually. These bonds are not redeemable prior to maturity, except
in the event of certain changes involving taxation in the United States or the
imposition of certain certification, identification or reporting requirements.
Simultaneous with the issuance of this debt, AIG entered into a swap
transaction which effectively converted AIG's net interest expense to a U.S.
dollar liability of approximately 7.9 percent, which requires the payment of
proceeds at maturity of approximately $159 million in exchange for 200 billion
Italian Lire and interest thereon.
(C) Notes and Debentures Issued by SunAmerica Inc.: As of December 31,
2000, Notes and Debentures issued by SunAmerica Inc. in aggregate principal
amount of $433 million (net of
51
53
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9. DEBT OUTSTANDING (continued)
amortized discount of $42 million) were outstanding with maturity dates from
2007 to 2097 at interest rates ranging from 5.60 percent to 9.95 percent.
(ii) Term Notes Issued by ILFC: ILFC has issued unsecured obligations
which may not be redeemed prior to maturity.
As of December 31, 2000, notes in aggregate principal amount of $3.46
billion were outstanding with maturity dates from 2001 to 2004 and interest
rates ranging from 5.63 percent to 8.88 percent. Term notes in the aggregate
principal amount of $350 million are at floating interest rates and the
remainder are at fixed rates. These notes provide for a single principal payment
at maturity.
At December 31, 2000, the maturity schedule for ILFC's Term Notes was as
follows:
(IN MILLIONS)
------------------------------------------------------------
PRINCIPAL
AMOUNT
------------------------------------------------------------
2001 $ 1,075
2002 1,283
2003 450
2004 649
------------------------------------------------------------
Total $ 3,457
------------------------------------------------------------
At December 31, 2000, ILFC had $75 million in aggregate principal amount of
debt securities registered for issuance from time to time, which debt had been
sold as of March 16, 2001. An additional $2.0 billion principal amount of debt
securities was registered as of January 5, 2001, under which $800 million in
notes were sold as of March 16, 2001. A $750 million Medium Term Note program
was implemented on January 19, 2001 under which $200 million has been sold as of
March 16, 2001. In addition, ILFC established a Euro Medium Term Note program
for $2.0 billion, under which $771 million in notes were sold through December
31, 2000.
ILFC has an Export Credit Facility up to a maximum of $4.3 billion, for
approximately 75 aircraft to be delivered through 2001. ILFC has the right, but
is not required, to use the facility to fund 85 percent of each aircraft's
purchase price. This facility is guaranteed by various European Export Credit
Agencies. The interest rate varies from 5.75 percent to 5.90 percent on the
first 75 aircraft depending on the delivery date of the aircraft. Through
December 31, 2000, ILFC borrowed $2.07 billion under this facility. Borrowings
with respect to this facility are included in Notes and Bonds Payable in the
accompanying table of borrowings. At December 31, 2000, the future minimum
payments for ILFC's borrowings under the Export Credit Facility were as follows:
(MILLIONS)
------------------------------------------------------------
PRINCIPAL
AMOUNT
------------------------------------------------------------
2001 $ 229
2002 229
2003 229
2004 229
2005 229
Remaining years after 2005 927
------------------------------------------------------------
Total $ 2,072
------------------------------------------------------------
AIG does not guarantee any of the debt obligations of ILFC.
(iii) Notes and Bonds Payable Issued by AIGFP: At December 31, 2000,
AIGFP's notes and bonds outstanding, the proceeds of which are invested in a
segregated portfolio of securities available for sale, were as follows:
(DOLLARS IN MILLIONS)
-------------------------------------------------------------------
RANGE OF RANGE OF U.S. DOLLAR
MATURITIES CURRENCY INTEREST RATES CARRYING VALUE
-------------------------------------------------------------------
2001 - 2029 US dollar 4.88-7.72% $ 4,140
2001 - 2005 Euro 4.60-7.19 1,781
2001 - 2005 United Kingdom pound 5.74-7.65 790
2001 - 2002 New Zealand dollar 8.51-9.43 596
2002 Japanese yen 4.50 190
-------------------------------------------------------------------
Total $ 7,497
-------------------------------------------------------------------
AIGFP is also obligated under various notes maturing from 2001 through
2026. The majority of these notes are denominated in U.S. dollars and Euros and
bear interest at various interest rates. At December 31, 2000, these notes had a
U.S. dollar carrying value of $1.3 billion.
AIG guarantees all of AIGFP's debt.
(iv) Notes and Bonds Payable Issued by AGC and AGF: As of December 31,
2000, notes in aggregate principal amount of $3.94 billion were outstanding with
maturity dates ranging from 2001 to 2029 at interest rates ranging from 5.75
percent to 8.45 percent. Term notes in the aggregate principal amount of $1.23
billion were at floating interest rates and the remainder were fixed rates.
These notes provide for a single principal payment at maturity.
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American International Group, Inc. and Subsidiaries
9. DEBT OUTSTANDING (continued)
At December 31, 2000, the maturity schedules for AGC and AGF Term Notes and
Bonds were as follows:
---------------------------------------------------------------
(IN MILLIONS) AGC AGF TOTAL
---------------------------------------------------------------
2001 $ -- $ 402 $ 402
2002 -- 351 351
2003 100 947 1,047
2004 149 199 348
2005 294 399 693
Remaining years after 2005 795 304 1,099
---------------------------------------------------------------
Total $1,338 $2,602 $3,940
---------------------------------------------------------------
AGC and AGF shared in a $6.2 billion unsecured bank credit facility to
support their commercial paper borrowings. There were no borrowings under this
facility as of December 31, 2000. AGC had $400 million in aggregate principal
amount of debt securities registered and available for issuance as of December
31, 2000. AGF had $1.6 billion in aggregate principal amount of debt securities
registered and available for issuance at December 31, 2000. AGC uses the
proceeds from the issuance of notes and bonds for general corporate purposes.
AGF uses the proceeds from the issuance of notes and bonds for the funding of
its finance receivables.
At December 31, 2000, AIG did not guarantee any of the debt obligations of
AGC and AGF.
(e) LOANS AND MORTGAGES PAYABLE: Loans and mortgages payable at December
31, 2000, consisted of the following:
(IN MILLIONS)
------------------------------------------------------------------
AIG
AIGF CONSUMER
ILFC HONG KONG FINANCE AIG TOTAL
------------------------------------------------------------------
Uncollateralized
loans payable $ -- $ 346 $ 662 $350 $1,358
Collateralized loans
and mortgages
payable 463 -- -- 90 553
------------------------------------------------------------------
Total $463 $ 346 $ 662 $440 $1,911
------------------------------------------------------------------
At December 31, 2000, ILFC's capital lease obligations were $463 million.
Fixed interest rates with respect to these obligations range from 6.18 percent
to 6.89 percent; variable rates are referenced to LIBOR. These obligations
mature through 2005. The flight equipment associated with the capital lease
obligations had a net book value of $1.01 billion.
At December 31, 2000, the maturity schedule for ILFC's capital lease
obligations, were as follows:
(IN MILLIONS)
------------------------------------------------------------
PRINCIPAL
AMOUNT
------------------------------------------------------------
2001 $ 127
2002 127
2003 127
2004 113
2005 46
------------------------------------------------------------
Total minimum lease obligations 540
Less amount representing interest 77
------------------------------------------------------------
Present value of net minimum capital lease
obligations $ 463
------------------------------------------------------------
(f) As of December 31, 2000, the combined principal payments due of all
significant debt, excluding commercial paper, in each of the next five years and
periods thereafter were as follows:
(IN MILLIONS)
------------------------------------------------------------
PRINCIPAL
AMOUNT
------------------------------------------------------------
2001 $ 16,254
2002 6,954
2003 4,639
2004 2,360
2005 1,845
Remaining years after 2005 9,224
------------------------------------------------------------
Total $ 41,276
------------------------------------------------------------
(g) REVOLVING CREDIT FACILITIES: AIG and Funding have entered into
syndicated revolving credit facilities (collectively, the Facility) aggregating
$1.5 billion. The Facility consists of $1.0 billion in short-term revolving
credit facilities and a $500 million five year revolving credit facility. The
Facility can be used for general corporate purposes and also to provide backup
for AIG's commercial paper programs administered by Funding. There are currently
no borrowings outstanding under the Facility, nor were any borrowings
outstanding as of December 31, 2000.
(h) INTEREST EXPENSE FOR ALL INDEBTEDNESS: Total interest expense for all
indebtedness, net of capitalized interest, aggregated $3.64 billion in 2000,
$2.96 billion in 1999 and $2.68 billion in 1998. Cash distributions on the
preferred shareholders' equity in subsidiary companies of ILFC and certain
SunAmerica, AGC and HSB subsidiaries are accounted for as interest expense and
included as minority interest in the consolidated statement of income. The cash
distributions for ILFC were approximately $19 million for the year ended
December 31, 2000 and $17 million in each of the years ended December 31, 1999
and 1998. The cash distributions for the SunAmerica subsidiaries were
approximately $62 million for the year ended December 31, 2000 and $40 million
in each of the years ended December 31, 1999 and 1998. The cash distributions
for AGC subsidiaries were approximately $137 million, $140
53
55
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9. DEBT OUTSTANDING (continued)
million and $135 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
10. PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY COMPANIES
Preferred shareholders' equity in subsidiary companies represents preferred
stocks issued by ILFC and certain SunAmerica, AGC and HSB subsidiaries, wholly
owned subsidiaries of AIG.
(a) ILFC: The preferred stock consists of 4,000 shares of market auction
preferred stock ("MAPS") in eight series of 500 shares each. Each of these
shares has a liquidation value of $100,000 per share and is not convertible. The
dividend rate, other than the initial rate, for each dividend period for each
series is reset approximately every seven weeks (49 days) on the basis of orders
placed in an auction. At December 31, 2000, the dividend rate ranged from 4.98
percent to 5.25 percent.
(b) SUNAMERICA: The preferred stock consists of $185 million liquidation
amount of 8.35% Trust Originated Preferred Securities issued by SunAmerica
Capital Trust II in October 1995, $310 million liquidation amount of 8.30% Trust
Originated Preferred Securities issued by SunAmerica Capital Trust III in
November 1996, and $350 million liquidation amount of 7.5% Non-Voting Preferred
Interests issued by Total Return LLC, a wholly owned subsidiary of SunAmerica,
in March 2000.
In connection with the issuance of the 8.35% Trust Originated Preferred
Securities and the related purchase by SunAmerica Inc. of the grantor trust's
common securities, SunAmerica Inc. issued to the grantor trust $191 million
principal amount of 8.35% junior subordinated debentures, due 2044.
In March 2001, SunAmerica Capital Trust II redeemed the 8.35% Trust
Originated Preferred Securities for a cash payment equal to the liquidation
amount of $185 million plus accrued and unpaid dividends at redemption date.
Concurrently, SunAmerica redeemed all of the related 8.35% junior subordinated
debentures, due 2044, for a liquidation amount of $191 million plus accrued
interest.
In connection with the issuance of the 8.30% Trust Originated Preferred
Securities and the related purchase by SunAmerica Inc. of the grantor trust's
common securities, SunAmerica Inc. issued to the grantor trust $321 million
principal amount of 8.30% junior subordinated debentures, due 2045, which are
redeemable at the option of AIG on or after November 13, 2001 at a redemption
price of $25 per debenture plus accrued and unpaid interest.
The interest and other payment dates on the debentures correspond to the
distribution and other payment dates on the preferred and common securities. The
preferred and common securities will be redeemed on a pro rata basis, to the
same extent as the debentures are repaid. Under certain circumstances involving
a change in law or legal interpretation, the debentures may be distributed to
holders of the preferred and common securities in liquidation of the grantor
trust(s). AIG's obligations under the debentures and related agreements, taken
together, provide a full and unconditional guarantee of payments due on the
preferred securities.
The grantor trusts are accounted for as wholly owned subsidiaries of AIG.
The debentures issued to the grantor trusts and the common securities purchased
by SunAmerica Inc. from the grantor trusts are eliminated in the consolidated
balance sheet.
In connection with the issuance of 7.5% Non-Voting Preferred Interests by
Total Return LLC in March 2000, SunAmerica issued a $350 million promissory note
to Total Return LLC, due 2003. The preferred interests receive cash
distributions and the note bears interest at a rate of 7.5%. The common
interests in Total Return LLC are wholly owned by SunAmerica, and the common
interests and the note are eliminated in the consolidated balance sheet.
(c) AGC: The preferred stock has been issued by an AGC subsidiary and five
subsidiary trusts (the subsidiaries).
The sole assets of these subsidiaries are Junior Subordinated Debentures
(Subordinated Debentures) issued by AGC and, in some cases, U.S. Treasury bonds.
These subsidiaries have no independent operations. The Subordinated Debentures
are eliminated in consolidation.
The interest terms and payment dates of the Subordinated Debentures held by
the subsidiaries correspond to those of the subsidiaries' preferred securities.
AGC's obligations under the Subordinated Debentures and related agreements, when
taken together, constitute a full and unconditional guarantee by AGC of payments
due on the preferred securities. The Subordinated Debentures are redeemable,
under certain conditions, at the option of AGC on a proportionate basis.
The preferred stock consists of $100 million liquidation value of 8.05%
preferred stock issued by American General Capital III in December 2000, $300
million liquidation value of 8.5% preferred stock issued by American General
Capital II in June 2000, $200 million liquidation value of 7.875% preferred
stock issued by American General Capital I in September 1999, $500 million
liquidation value of 8.125% preferred stock issued by American General
Institutional Capital B in March 1997, $500 million liquidation value of 7.57%
preferred stock issued by American General Institutional Capital A in December
1996, $215 million liquidation value of 8.125% preferred stock issued by
American General Capital, L.L.C. in August 1995 and $287 million liquidation
value of 8.45% preferred stock issued by American General Capital, L.L.C. in
June 1995.
On March 1, 2000, AGC redeemed 2.3 million shares or $85 million of its 7
percent convertible preferred stock by issuing 3.8 million shares of AGC common
stock.
On June 30, 2000, holders converted approximately 5 million shares or $250
million of 6 percent convertible preferred securities issued by American General
Delaware, L.L.C. into 12.3 million shares of AGC common stock.
54
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American International Group, Inc. and Subsidiaries
10. PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY
COMPANIES (continued)
(d) HSB: The preferred stock consists of $110 million liquidation value of
Exchange Capital Securities issued by HSB Capital I, a statutory business trust
wholly owned by HSB, which has invested $113.4 million in debt securities of
HSB. The capital securities accrue and pay quarterly cash distributions at a
variable rate equal to 90 day LIBOR plus 0.91% of the stated liquidation amount
of $1,000 per capital security, which rate was 6.6% at December 31, 2000. The
capital securities are not redeemable prior to July 15, 2007 and are mandatorily
redeemable upon the maturity of the debt securities on July 15, 2027 or the
earlier redemption of the debt securities. AIG has issued a guarantee of the
obligations of HSB, which together with the terms of the debt securities, the
guarantee of HSB with respect to the capital securities, the indenture and the
trust agreement with respect to the trust provide a full and unconditional
guarantee of payments due on the capital securities. The trust is accounted for
as a wholly owned subsidiary of AIG. The debt securities issued to the trust and
the common securities issued by the trust to HSB are eliminated in the
consolidated balance sheet.
11. CAPITAL FUNDS
(a) AIG parent depends on its subsidiaries for cash flow in the form of loans,
advances and dividends. AIG's insurance subsidiaries are subject to regulatory
restrictions on the amount of dividends which can be remitted to AIG parent.
These restrictions vary by state. For example, unless permitted by the New York
Superintendent of Insurance, general insurance companies domiciled in New York
may not pay dividends to shareholders which in any twelve month period exceed
the lesser of 10 percent of the company's statutory policyholders' surplus or
100 percent of its "adjusted net investment income", as defined. Generally, less
severe restrictions applicable to both general and life insurance companies
exist in most of the other states in which AIG's insurance subsidiaries are
domiciled. Certain foreign jurisdictions have restrictions which generally cause
only a temporary delay in the remittance of dividends. There are also various
local restrictions limiting cash loans and advances to AIG by its subsidiaries.
Largely as a result of the restrictions, approximately 65 percent of
consolidated capital funds were restricted from immediate transfer to AIG parent
at December 31, 2000.
(b) At December 31, 2000, there were 6,000,000 shares of AIG's $5 par value
serial preferred stock authorized, issuable in series.
(c) The activity for preferred stock issued by SunAmerica Inc. prior to the
merger with AIG for the year ended December 31, 1999 and the year ended
September 30, 1998 was as follows:
-------------------------------------------------------------
1999 1998
-------------------------------------------------------------
Shares outstanding at beginning of
year 4,000,000 4,000,000
Redemption of Series E Depositary
Shares (4,000,000) --
-------------------------------------------------------------
Shares outstanding at end of year -- 4,000,000
-------------------------------------------------------------
On November 1, 1995, SunAmerica Inc. issued 4,000,000 $3.10 Depositary
Shares (the "Series E Depositary Shares"), each representing one-fiftieth of a
share of Series E Mandatory Conversion Premium Dividend Preferred Stock, with a
liquidation preference of $62 per share. On October 30, 1998, SunAmerica Inc.
redeemed all of its Series E Depositary Shares, which resulted in the issuance
of 11,250,709 shares of SunAmerica Inc. common stock and cash payment of all
accrued and unpaid dividends through the redemption date.
(d) The common stock activity for the three years ended December 31, 2000
was as follows:
---------------------------------------------------------------------
2000(A) 1999(A) 1998(A)(B)
---------------------------------------------------------------------
Shares outstanding at
beginning of year 1,836,381,824 1,508,726,189 1,148,174,473
Acquired during the
year (19,677,939) (9,612,001) (4,415,659)
Conversion of Series E
Preferred Stock -- 9,619,356 --
Conversion of PERCS
Units -- 8,642,535 --
Issued pursuant to
Restricted Stock
Unit Obligations -- 538,649 --
Conversion of
preferred stock and
securities 9,317,340 971,898 --
Issued under stock
option and purchase
plans 7,307,010 7,935,164 3,184,291
Issued in connection
with acquisitions 17,774,094 -- 11,769,264
Issued under
contractual
obligations 63,277 7,094 37,123
Stock split effected
as stock dividend 814,956,829 327,061,951 379,536,828
Other(c) (43,516,510) (17,509,011) (29,560,131)
---------------------------------------------------------------------
Shares outstanding at
end of year 2,622,605,925 1,836,381,824 1,508,726,189
---------------------------------------------------------------------
(a) Outstanding shares have been adjusted to reflect the conversion of all
outstanding AGC shares by converting each outstanding share of AGC to 0.5790
shares of AIG.
(b) Outstanding shares have been adjusted to reflect the conversion of all
outstanding SunAmerica Inc. shares by converting each outstanding share of
SunAmerica Inc. to 0.855 shares of AIG.
(c) Primarily shares issued to AIG and subsidiaries as part of stock split
effected as stock dividend and conversion of SunAmerica Inc. non-
transferrable Class B stock to common stock.
55
57
--------------------------------------------------------------------------------
11. CAPITAL FUNDS (continued)
Common stock increased and retained earnings decreased $2.04 billion in
2000, $818 million in 1999 and $949 million in 1998 as a result of common stock
splits in the form of 50 percent, 25 percent and 50 percent common stock
dividends paid July 28, 2000, July 30, 1999 and July 31, 1998, respectively.
(e) On November 6, 1996, SunAmerica Inc. issued 11,500,000 8 1/2% Premium
Equity Redemption Cumulative Security Units (the "Units") with a stated amount
of $37.50 per Unit. Each Unit consisted of a stock purchase contract (the
"Contract") and a United States Treasury Note (the "Treasury Note") having a
principal amount equal to the stated amount. These Units were scheduled to
mature on October 31, 1999. The holders of the Units received interest on the
Treasury Notes payable by the United States Government at a rate of 7 1/2% per
annum and Contract fees payable at a rate of 1% per annum (both, the "Unit
Payments") based upon the stated amount. The Units provided that SunAmerica Inc.
would deliver on October 31, 1999 to the holder of each Unit one and one-half
shares of common stock of SunAmerica Inc., subject to adjustment under certain
defined circumstances, and obligated the holder of the Unit to pay to SunAmerica
Inc. $37.50 per Unit. The Treasury Notes were held by a collateral agent to
secure payment to SunAmerica Inc. as required under the Contract, but could be
redeemed by the holders of the Units under certain defined circumstances.
SunAmerica Inc. redeemed all of its Units on December 6, 1998. In connection
with this redemption, SunAmerica Inc. issued 10,108,229 shares of SunAmerica
Inc. common stock and made a cash payment for all accrued and unpaid Contract
fees.
(f) Statement of Accounting Standards No. 130 "Comprehensive Income" (FASB
130) was adopted by AIG effective January 1, 1998. FASB 130 establishes
standards for reporting comprehensive income and its components as part of
capital funds. The reclassification adjustments with respect to available for
sale securities were $(314) million, $103 million and $130 million for December
31, 2000, 1999 and 1998, respectively.
12. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, various commitments and contingent liabilities
are entered into by AIG and certain of its subsidiaries. In addition, AIG
guarantees various obligations of certain subsidiaries.
(a) Commitments to extend credit are agreements to lend subject to certain
conditions. These commitments generally have fixed expiration dates or
termination clauses and typically require payment of a fee. These commitments
approximated $500 million and $150 million for December 31, 2000 and 1999,
respectively. AIG uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. AIG
evaluates each counterparty's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by AIG upon extension of
credit, is based on management's credit evaluation of the counterparty.
(b) AIG and certain of its subsidiaries become parties to financial
instruments with market risk resulting from both dealer and end user activities
and to reduce currency, interest rate, equity and commodity exposures. To the
extent those instruments are carried at their estimated fair value, the elements
of currency, interest rate, equity and commodity risks are reflected in the
consolidated balance sheet. In addition, these instruments involve, to varying
degrees, elements of credit risk not explicitly recognized in the consolidated
balance sheet. Collateral is required, at the discretion of AIG, on certain
transactions based on the creditworthiness of the counterparty.
(c) AIGFP becomes a party to derivative financial instruments in the normal
course of its business and to reduce its currency, interest rate and equity
exposures. Interest rate, currency and equity risks related to such instruments
are reflected in the consolidated financial statements to the extent these
instruments are carried at a market or a fair value, whichever is appropriate.
Because of limited liquidity of certain of these instruments, the recorded
estimated fair values of such instruments may be different than the values that
might be realized if AIGFP were to sell or close out the transactions prior to
maturity.
AIGFP, in the ordinary course of its operations and as principal,
structures derivative transactions to meet the needs of investors who may be
seeking to hedge certain aspects of such investors' operations. AIGFP may also
enter into derivative transactions for its own account. Such derivative
transactions include interest rate, currency and equity swaps, swaptions and
forward commitments. Interest rate swap transactions generally involve the
exchange of fixed and floating rate interest payment obligations without the
exchange of the underlying principal amounts. AIGFP typically becomes a
principal in the exchange of interest payments between the parties and,
therefore, may be exposed to loss, if counterparties default. Currency and
equity swaps are similar to interest rate swaps, but may involve the exchange of
principal amounts at the beginning and end of the transaction. Swaptions are
options where the holder has the right but not the obligation to enter into a
swap transaction or cancel an existing swap transaction. At December 31, 2000,
the notional principal amount of the sum of the swap pays and receives
approximated $521.0 billion, primarily related to interest rate swaps of
approximately $344.2 billion.
The following tables provide the contractual and notional amounts of
derivatives transactions of AIGFP and AIGTG at December 31, 2000.
The notional amounts used to express the extent of involvement in swap
transactions represent a standard of measurement of the volume of swaps business
of AIGFP and AIGTG. Notional amount is not a quantification of market risk or
credit risk and it may not necessarily be recorded on the balance sheet.
Notional amounts represent those amounts used to calculate contractual cash
flows to be exchanged and are not paid or received, except for certain contracts
such as currency swaps.
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American International Group, Inc. and Subsidiaries
12. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
The timing and the amount of cash flows relating to AIGFP's and AIGTG's
foreign exchange forwards and exchange traded futures and options contracts are
determined by each of the respective contractual agreements.
The following table presents AIGFP's derivatives portfolio by maturity and
type of derivative at December 31, 2000 and December 31, 1999:
(IN MILLIONS)
--------------------------------------------------------------------------------
REMAINING LIFE
---------------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 2000 1999
--------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE, CURRENCY AND EQUITY/COMMODITY SWAPS
AND SWAPTIONS:
NOTIONAL AMOUNT:
Interest rate swaps $ 70,847 $173,892 $ 90,745 $ 8,719 $344,203 $281,682
Currency swaps 34,507 44,271 33,185 5,829 117,792 83,673
Swaptions and equity swaps 12,216 30,835 10,692 5,283 59,026 48,002
--------------------------------------------------------------------------------------------------------------------------------
Total $117,570 $248,998 $134,622 $19,831 $521,021 $413,357
--------------------------------------------------------------------------------------------------------------------------------
Futures and forward contracts are contracts for delivery of foreign
currencies or financial indices in which the seller/purchaser agrees to
make/take delivery at a specified future date of a specified instrument, at a
specified price or yield. Risks arise as a result of movements in current market
prices from contracted prices and the potential inability of counterparties to
meet their obligations under the contracts. At December 31, 2000, the
contractual amount of AIGFP's futures and forward contracts approximated $33.9
billion.
The following table presents AIGFP's futures and forward contracts
portfolio by maturity and type of derivative at December 31, 2000 and December
31, 1999:
(IN MILLIONS)
--------------------------------------------------------------------------------
REMAINING LIFE
--------------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 2000 1999
--------------------------------------------------------------------------------------------------------------------
Futures and forward contracts:
Exchange traded futures contracts
contractual amount $11,082 -- -- -- $11,082 $ 6,587
--------------------------------------------------------------------------------------------------------------------
Over the counter forward contracts
contractual amount $22,263 $502 $44 -- $22,809 $21,873
--------------------------------------------------------------------------------------------------------------------
These instruments involve, to varying degrees, elements of credit risk not
explicitly recognized in the consolidated financial statements.
AIGFP utilizes various credit enhancements, including collateral, credit
triggers and credit derivatives to reduce the credit exposure relating to these
off-balance sheet financial instruments. AIGFP requires credit enhancements in
connection with specific transactions based on, among other things, the
creditworthiness of the counterparties and the transaction's size and maturity.
In addition, AIGFP's derivative transactions are generally documented under ISDA
Master Agreements. Management believes that such agreements provide for legally
enforceable set-off and close out netting of exposures to specific
counterparties. Under such agreements, in connection with an early termination
of a transaction, AIGFP is permitted to set off its receivables from a
counterparty against its payables to the same counterparty arising out of all
included transactions. As a result, the net replacement value represents the net
sum of estimated positive fair values after the application of such strategies,
agreements and collateral held. Prior to the application of the aforementioned
credit enhancements, the gross exposure to credit risk with respect to these
derivative instruments was $33.4 billion at December 31, 2000 and $16.90 billion
at December 31, 1999. Subsequent to the application of such credit enhancements,
the net exposure to credit risk or the net replacement value of all interest
rate, currency, and equity swaps, swaptions and forward commitments approximated
$9.51 billion at December 31, 2000 and $7.53 billion at December 31, 1999. The
net replacement value for futures and forward contracts approximated $204
million at December 31, 2000 and $5 million at December 31, 1999. The net
replacement value most closely represents the net credit risk to AIGFP or the
maximum amount exposed to potential loss.
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AIGFP independently evaluates the creditworthiness of its counterparties,
taking into account credit ratings assigned by recognized statistical rating
organizations. In addition, AIGFP's credit approval process involves pre-set
counterparty, country and industry credit exposure limits and, for particularly
credit intensive transactions, obtaining approval from AIG's Credit Risk
Committee. The average credit rating of AIGFP's counterparties as a whole (as
measured by AIGFP) is equivalent to AA. The maximum potential loss will increase
or decrease during the life of the derivative commitments as a function of
maturity and market conditions.
AIGFP determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 2000 and
December 31, 1999, the counterparty credit quality by derivative product with
respect to the net replacement value of AIGFP's derivatives portfolio was as
follows:
(IN MILLIONS)
--------------------------------------------------------------------------------
NET REPLACEMENT VALUE
--------------------------------
SWAPS AND FUTURES AND TOTAL TOTAL
SWAPTIONS FORWARD CONTRACTS 2000 1999
----------------------------------------------------------------------------------------------------------------------
Counterparty credit quality:
AAA $3,778 $ -- $3,778 $2,067
AA 2,621 204 2,825 2,839
A 1,801 -- 1,801 1,576
BBB 1,059 -- 1,059 997
Below investment grade 252 -- 252 55
----------------------------------------------------------------------------------------------------------------------
Total $9,511 $204 $9,715 $7,534
----------------------------------------------------------------------------------------------------------------------
At December 31, 2000 and December 31, 1999, the counterparty breakdown by
industry with respect to the net replacement value of AIGFP's derivatives
portfolio was as follows:
(IN MILLIONS)
--------------------------------------------------------------------------------
NET REPLACEMENT VALUE
--------------------------------
SWAPS AND FUTURES AND TOTAL TOTAL
SWAPTIONS FORWARD CONTRACTS 2000 1999
----------------------------------------------------------------------------------------------------------------------
Non-U.S. banks $2,419 $ 98 $2,517 $2,515
Insured municipalities 595 -- 595 352
U.S. industrials 1,945 -- 1,945 780
Governmental 463 -- 463 180
Non-U.S. financial service companies 309 -- 309 158
Non-U.S. industrials 1,372 -- 1,372 1,117
Special purpose 1,204 -- 1,204 716
U.S. banks 114 106 220 510
U.S. financial service companies 894 -- 894 1,112
Supranationals 196 -- 196 94
----------------------------------------------------------------------------------------------------------------------
Total $9,511 $204 $9,715 $7,534
----------------------------------------------------------------------------------------------------------------------
Securities sold, but not yet purchased represent obligations of AIGFP to
deliver specified securities at their contracted prices, and thereby create a
liability to repurchase the securities in the market at prevailing prices.
AIGFP monitors and controls its risk exposure on a daily basis through
financial, credit and legal reporting systems and, accordingly, believes that it
has in place effective procedures for evaluating and limiting the credit and
market risks to which it is subject. Management is not aware of any potential
counterparty defaults.
Commissions, transaction and other fees for the twelve months ended
December 31, 2000, 1999 and 1998 from AIGFP's operations were $1.06 billion,
$737 million and $550 million, respectively.
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American International Group, Inc. and Subsidiaries
(d) AIGTG becomes a party to off-balance sheet financial instruments in the
normal course of its business and to reduce its currency, interest rate and
commodity exposures.
Futures and forward contracts are contracts for delivery of foreign
currencies, commodities or financial indices in which the seller/purchaser
agrees to make/take delivery at a specified future date of a specified
instrument, at a specified price or yield. Risks arise as a result of movements
in current market prices from contracted prices and the potential inability of
counterparties to meet their obligations under the contracts. Options are
contracts that allow the holder of the option to purchase or sell the underlying
commodity, currency or index at a specified price and within, or at, a specified
period of time. Risks arise as a result of movements in current market prices
from contracted prices, and the potential inability of the counterparties to
meet their obligations under the contracts. As a writer of options, AIGTG
generally receives an option premium and then manages the risk of any
unfavorable change in the value of the underlying commodity, currency or index.
At December 31, 2000, the contractual amount of AIGTG's futures, forward and
option contracts approximated $461.0 billion.
The gross replacement values presented represent the sum of the estimated
positive fair values of all of AIGTG's derivatives contracts at December 31,
2000 and December 31, 1999. These values do not represent the credit risk to
AIGTG.
Net replacement values presented represent the net sum of estimated
positive fair values after the application of legally enforceable master
closeout netting agreements and collateral held. The net replacement values most
closely represent the net credit risk to AIGTG or the maximum amount exposed to
potential loss within a product category. At December 31, 2000, the net
replacement value of AIGTG's futures, forward and option contracts and interest
rate and currency swaps approximated $4.1 billion.
The following table provides the contractual and notional amounts and
credit exposure, if applicable, by maturity and type of derivative of AIGTG's
derivatives portfolio at December 31, 2000 and December 31, 1999. In addition,
the estimated positive fair values associated with the derivatives portfolio are
also provided and include a maturity profile for the December 31, 2000 balances
based upon the expected timing of the future cash flows.
(IN MILLIONS)
--------------------------------------------------------------------------------
REMAINING LIFE
---------------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 2000 1999
--------------------------------------------------------------------------------------------------------------------------------
Contractual amount of futures, forwards and
options:
Exchange traded futures and options $ 13,715 $ 4,318 $ 31 $ -- $ 18,064 $ 18,908
--------------------------------------------------------------------------------------------------------------------------------
Forwards $216,062 $16,160 $ 2,094 $ -- $234,316 $220,428
--------------------------------------------------------------------------------------------------------------------------------
Over the counter purchased options $ 59,922 $19,581 $25,222 $194 $104,919 $ 83,871
--------------------------------------------------------------------------------------------------------------------------------
Over the counter sold options(a) $ 58,754 $19,369 $25,422 $197 $103,742 $ 86,726
--------------------------------------------------------------------------------------------------------------------------------
Notional amount:
Interest rate swaps and forward rate agreements $ 18,960 $36,598 $ 7,592 $114 $ 63,264 $ 80,436
Currency swaps 1,071 6,668 834 -- 8,573 8,359
Swaptions 2,398 10,978 1,970 73 15,419 9,996
--------------------------------------------------------------------------------------------------------------------------------
Total $ 22,429 $54,244 $10,396 $187 $ 87,256 $ 98,791
--------------------------------------------------------------------------------------------------------------------------------
Credit exposure:
Futures, forwards swaptions and purchased options
contracts and interest rate and currency swaps:
Gross replacement value $ 7,219 $ 2,263 $ 831 $ 6 $ 10,319 $ 7,889
Master netting arrangements (4,061) (1,467) (602) (6) (6,136) (4,580)
Collateral (65) (34) (8) -- (107) (209)
--------------------------------------------------------------------------------------------------------------------------------
Net replacement value(b) $ 3,093 $ 762 $ 221 $ -- $ 4,076 $ 3,100
--------------------------------------------------------------------------------------------------------------------------------
(a) Sold options obligate AIGTG to buy or sell the underlying item if the option
purchaser chooses to exercise. The amounts do not represent credit exposure.
(b) The net replacement values with respect to exchange traded futures and
options, forward contracts and purchased over the counter options are
presented as a component of trading assets in the accompanying balance
sheet. The net replacement values with respect to interest rate and currency
swaps are presented as a component of unrealized gain on interest rate and
currency swaps, options and forward transactions in the accompanying balance
sheet.
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AIGTG independently evaluates the creditworthiness of its counterparties,
taking into account credit ratings assigned by recognized statistical rating
organizations. In addition, AIGTG's credit approval process involves pre-set
counterparty, country and industry credit exposure limits and, for particularly
credit intensive transactions, obtaining approval from AIG's Credit Risk
Committee. The maximum potential loss will increase or decrease during the life
of the derivative commitments as a function of maturity and market conditions.
AIGTG determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 2000 and
December 31, 1999, the counterparty credit quality and counterparty breakdown by
industry with respect to the net replacement value of AIGTG's derivatives
portfolio were as follows:
(IN MILLIONS)
------------------------------------------------------------
NET
REPLACEMENT VALUE
------------------
2000 1999
------------------------------------------------------------
Counterparty credit quality:
AAA $ 442 $ 276
AA 1,807 1,241
A 1,139 1,010
BBB 460 256
Below investment grade 48 49
Not externally rated, including
exchange traded futures and options* 180 268
------------------------------------------------------------
Total $4,076 $3,100
------------------------------------------------------------
Counterparty breakdown by industry:
Non-U.S. banks $2,076 $ 926
U.S. industrials 67 70
Governmental 70 178
Non-U.S. financial service companies 282 698
Non-U.S. industrials 243 176
U.S. banks 468 401
U.S. financial service companies 690 383
Exchanges* 180 268
------------------------------------------------------------
Total $4,076 $3,100
------------------------------------------------------------
* Exchange traded futures and options are not deemed to have significant credit
exposure as the exchanges guarantee that every contract will be properly
settled on a daily basis.
Spot commodities sold but not yet purchased represent obligations of AIGTG
to deliver spot commodities at their contracted prices and thereby create a
liability to repurchase the spot commodities in the market at prevailing prices.
AIGTG limits its risks by holding offsetting positions. In addition, AIGTG
monitors and controls its risk exposures through various monitoring systems
which evaluate AIGTG's market and credit risks, and through credit approvals and
limits. At December 31, 2000, AIGTG did not have a significant concentration of
credit risk from either an individual counterparty or group of counterparties.
Commissions, transaction and other fees for the twelve months ended
December 31, 2000, 1999 and 1998 from AIGTG's operations were $254 million, $227
million and $374 million, respectively.
At December 31, 2000, AIGTG had issued and outstanding a $28 million
principal amount letter of credit. This letter of credit was issued to a central
bank.
AIG has issued unconditional guarantees with respect to the prompt payment,
when due, of all present and future obligations and liabilities of AIGFP and
AIGTG arising from transactions entered into by AIGFP and AIGTG.
(e) As a component of its asset and liability management strategy,
SunAmerica utilizes swap agreements to match more closely the cash flows of its
assets to the cash flows of its liabilities. SunAmerica uses these swap
agreements to hedge against the risk of interest rate changes. At December 31,
2000, SunAmerica's swap agreements had an aggregate notional principal amount of
$12.25 billion. These agreements mature in various years through 2030.
For investment purposes, SunAmerica has entered into various total return
agreements with an aggregate notional amount of $28 million (the "notional
amount") at December 31, 2000. The total return agreements effectively exchange
a fixed rate of interest (the "payment amount") on the notional amount for the
coupon income plus or minus the increase or decrease in the fair value of
specified non-investment grade bonds (the "bonds"). SunAmerica is exposed to
potential loss with respect to credit risk on the underlying non-investment
grade bonds and fair value risk resulting from the payment amount and any
depreciation in the aggregate fair value of the bonds below the notional amount.
SunAmerica is also exposed to potential credit loss in the event of
nonperformance by the investment grade rated counterparty with respect to any
increase in the aggregate market value of the bonds above the notional amount.
However, nonperformance is not anticipated and, therefore, no collateral is held
or pledged. The agreements are marked to market and the change in market value
is recognized currently in life investment income. Net amounts received (paid)
are included in operating income and totaled ($39 million) and ($12 million) for
the years ended December 31, 2000 and 1999, respectively, and ($34 million) for
the year ended September 30, 1998. AIG guarantees the payment obligations of
SunAmerica under such agreements.
(f) AGC and certain of its subsidiaries have entered into various interest
rate and currency swap agreements, treasury rate lock agreements and options to
enter into interest rate swap agreements. AGC uses these agreements to hedge its
exposure to interest rate changes and currency rate fluctuations that are
associated with investment operations and/or anticipated debt issuances. At
December 31, 2000, AGC's swap agreements with respect to investment operations
had an aggregate notional amount
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American International Group, Inc. and Subsidiaries
of $332 million; AGC's swap agreements with respect to debt (principally in
connection with the operations of AGF) was $2.85 billion. There were no treasury
rate lock agreements outstanding at December 31, 2000. The impact of AGC's
derivatives on AIG's results of operations, financial condition and liquidity
was insignificant.
(g) At December 31, 2000, ILFC had committed to purchase 488 aircraft
deliverable from 2001 through 2009 at an estimated aggregate purchase price of
$27.3 billion and had options to purchase 51 aircraft deliverable from 2001
through 2008 at an estimated aggregate purchase price of $3.0 billion. ILFC will
be required to find customers for any aircraft presently on order and any
aircraft to be ordered, and it must arrange financing for portions of the
purchase price of such equipment.
(h) AIG and its subsidiaries, in common with the insurance industry in
general, are subject to litigation, including claims for punitive damages, in
the normal course of their business. AIG does not believe that such litigation
will have a material effect on its operating results and financial condition.
AIG continues to receive claims asserting injuries from toxic waste,
hazardous substances, and other environmental pollutants and alleged damages to
cover the cleanup costs of hazardous waste dump sites (hereinafter collectively
referred to as environmental claims) and indemnity claims asserting injuries
from asbestos. Estimation of asbestos and environmental claims loss reserves is
a difficult process, as these claims, which emanate from policies written in
1984 and prior years, cannot be estimated by conventional reserving techniques.
Asbestos and environmental claims development is affected by factors such as
inconsistent court resolutions, the broadening of the intent of policies and
scope of coverage and increasing number of new claims. AIG and other industry
members have and will continue to litigate the broadening judicial
interpretation of policy coverage and the liability issues. If the courts
continue in the future to expand the intent of the policies and the scope of the
coverage, as they have in the past, additional liabilities would emerge for
amounts in excess of reserves held. This emergence cannot now be reasonably
estimated, but could have a material impact on AIG's future operating results.
The reserves carried for these claims as at December 31, 2000 ($2.45 billion
gross; $855 million net) are believed to be adequate as these reserves are based
on known facts and current law.
A summary of reserve activity, including estimates for applicable incurred
but not reported losses and loss expenses, relating to asbestos and
environmental claims separately and combined at December 31, 2000, 1999 and 1998
follows.
(IN MILLIONS)
------------------------------------------------------------------------------------------------------------------
2000 1999 1998
-------------- --------------- ---------------
GROSS NET GROSS NET GROSS NET
------------------------------------------------------------------------------------------------------------------
Asbestos:
Reserve for losses and loss expenses at beginning of year $1,093 $306 $ 964 $ 259 $ 842 $ 195
Losses and loss expenses incurred 405 80 404 101 375 111
Losses and loss expenses paid (398) (48) (275) (54) (253) (47)
------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $1,100 $338 $1,093 $ 306 $ 964 $ 259
------------------------------------------------------------------------------------------------------------------
Environmental:
Reserve for losses and loss expenses at beginning of year $1,519 $585 $1,535 $ 605 $1,467 $ 592
Losses and loss expenses incurred (44) (45) 127 47 284 107
Losses and loss expenses paid (130) (23) (143) (67) (216) (94)
------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $1,345 $517 $1,519 $ 585 $1,535 $ 605
------------------------------------------------------------------------------------------------------------------
Combined:
Reserve for losses and loss expenses at beginning of year $2,612 $891 $2,499 $ 864 $2,309 $ 787
Losses and loss expenses incurred 361 35 531 148 659 218
Losses and loss expenses paid (528) (71) (418) (121) (469) (141)
------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $2,445 $855 $2,612 $ 891 $2,499 $ 864
------------------------------------------------------------------------------------------------------------------
(i) AGC Litigation: In the mid-1990s, a subsidiary of AGC, A.G. Financial
Service Center, Inc. (formerly named American General Financial Center),
provided financing for satellite dishes sold by independent unaffiliated
dealers. On May 18, 1999, a Mississippi state court rendered a judgment against
A.G. Financial Service Center for approximately $500,000 in compensatory damages
and $167 million in punitive damages, in a lawsuit brought by 29 individuals who
had each purchased a satellite dish. In 1999, A.G. Financial Service Center
voluntarily filed for bankruptcy.
As part of the resolution process, certain settlement agreements were
executed in January 2000. Accordingly, AGC recorded a charge of $57 million in
the fourth quarter of 1999 to cover the proposed settlements of this and other
litigation. On September 1, 2000, payment was made as final settlement of these
agreements.
In 2000, A.G. Financial Service Center filed a plan of reorganization to
resolve the remaining claims filed in the bankruptcy. In January 2001, A.G.
Financial Service Center and the creditors' committee in the bankruptcy entered
into a
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settlement that has been approved by the bankruptcy court. The plan of
reorganization was confirmed by the bankruptcy court in February 2001. Certain
creditors may appeal the confirmation of the plan, but it is not expected that
the appeals will prevail. AIG expects the remaining recorded liability related
to this matter to be sufficient to cover the costs of the plan of
reorganization.
Prior to AGC's acquisition of USLIFE Corporation (USLIFE), one of USLIFE's
subsidiaries entered the workers' compensation reinsurance business in 1997. AGC
subsidiaries discontinued writing new workers' compensation reinsurance business
in 1998. The largest contract with respect to this workers' compensation
reinsurance business was a quota share reinsurance agreement with Superior
National Insurance Group, Inc. and its affiliates (Superior National), effective
May 1, 1998. On November 29, 1999, AGC initiated an arbitration proceeding to
rescind this contract from its inception, based in part on misrepresentations
and nondisclosures which AGC believes were made by Superior National.
In 2000, the California Department of Insurance ordered seizure of certain
of Superior National's insurance subsidiaries as a result of their financial
condition, and Superior National Insurance Group, Inc. voluntarily filed for
bankruptcy.
Through the arbitration with Superior National, AGC has and will fully
pursue all remedies. Based on the advice of counsel, AGC believes that it will
succeed in rescinding the contract. However, risks and uncertainties remain with
respect to the ultimate outcome. In the event AGC does not prevail in the
arbitration, AIG believes that any ultimate loss related to this workers'
compensation business will not have a material adverse effect on AIG's future
results of operations, financial condition or liquidity.
In the second quarter of 2000, AGC recorded a charge of $265 million for
the settlement of class action litigation and related regulatory inquiries
primarily concerning sales of industrial life insurance. The charge covered the
cost of policyholder benefits, including premium adjustments and benefit
enhancements, and other charges and expenses resulting from the settlements, as
well as related administrative and legal costs. The class action settlement
became final and no longer subject to appeal in the fourth quarter of 2000.
In June 2000, AGC discovered a potential fraud committed against one of its
subsidiaries which conducts mortgage warehouse lending activities. Mortgages
processed by one originator allegedly had been funded based on fraudulent
information. In July 2000, the originator's license was suspended and the
originator and its parent company filed for bankruptcy. Based on the available
information, AGC recorded a charge of $50 million in the second quarter of 2000
for its loss related to this alleged fraud. AGC is pursuing all appropriate
remedies and AIG believes that AGC's recorded liability is sufficient to cover
this loss.
In 1998, certain of AGC's life insurance subsidiaries entered into
agreements to resolve substantially all material pending market conduct class
action lawsuits. Concurrently, AGC recorded a charge of $378 million. The charge
covered the cost of additional policyholder benefits and other anticipated
expenses resulting from the proposed settlements, as well as other
administrative and legal costs.
(j) Risk Based Capital (RBC) is designed to measure the adequacy of an
insurer's statutory surplus in relation to the risks inherent in its business.
Thus, inadequately capitalized general and life insurance companies may be
identified.
The RBC formula develops a risk adjusted target level of adjusted statutory
capital by applying certain factors to various asset, premium and reserve items.
Higher factors are applied to more risky items and lower factors are applied to
less risky items. Thus, the target level of statutory surplus varies not only as
a result of the insurer's size, but also on the risk profile of the insurer's
operations.
The RBC Model Law provides for four incremental levels of regulatory
attention for insurers whose surplus is below the calculated RBC target. These
levels of attention range in severity from requiring the insurer to submit a
plan for corrective action to actually placing the insurer under regulatory
control.
The statutory surplus of each of AIG's domestic general and life insurance
subsidiaries exceeded their RBC standards by considerable margins as of December
31, 2000.
To the extent that any of AIG's insurance entities would fall below
prescribed levels of surplus, it would be AIG's intention to infuse necessary
capital to support that entity.
(k) SunAmerica has established a deferred compensation plan for its
registered representatives, pursuant to which participants have the opportunity
to invest deferred commissions and fees on a notional basis. The value of the
deferred compensation fluctuates with the value of the deferred investment
alternatives chosen. AIG has provided a full and unconditional guarantee of the
obligations of SunAmerica to pay the deferred compensation under the plan.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" (FASB 107) requires disclosure of fair value
information about financial instruments, as defined therein, for which it is
practicable to estimate such fair value. These financial instruments may or may
not be recognized in the consolidated balance sheet. In the measurement of the
fair value of certain of the financial instruments, quoted market prices were
not available and other valuation techniques were utilized. These derived fair
value estimates are significantly affected by the assumptions used. FASB 107
excludes certain financial instruments, including those related to insurance
contracts.
The following methods and assumptions were used by AIG in estimating the
fair value of the financial instruments presented:
Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values.
Fixed maturity securities: Fair values for fixed maturity securities
carried at amortized cost or at market value were generally based upon quoted
market prices. For certain fixed maturity securities for which market prices
were not readily available, fair values were estimated using values obtained
from independent pricing services. No other fair valuation techniques were
applied to
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American International Group, Inc. and Subsidiaries
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
these securities as AIG believes it would have to expend excessive costs for the
benefits derived.
Equity securities: Fair values for equity securities were based upon quoted
market prices.
Mortgage loans on real estate, policy and collateral loans: Where
practical, the fair values of loans on real estate and collateral loans were
estimated using discounted cash flow calculations based upon AIG's current
incremental lending rates for similar type loans. The fair values of the policy
loans were not calculated as AIG believes it would have to expend excessive
costs for the benefits derived.
Trading assets and trading liabilities: Fair values for trading assets and
trading liabilities approximate the carrying values presented in the
consolidated balance sheet.
Finance receivables: the fair values of finance receivables were estimated
using discounted cash flow calculations based upon the weighted average rates
currently being offered for similar finance receivables.
Securities available for sale: Fair values for securities available for
sale and related hedges were based on quoted market prices. For securities and
related hedges for which market prices were not readily available, fair values
were estimated using quoted market prices of comparable investments.
Trading securities: Fair values for trading securities were based on
current market value where available. For securities for which market values
were not readily available, fair values were estimated using quoted market
prices of comparable investments.
Spot commodities: Fair values for spot commodities were based on current
market prices.
Unrealized gains and losses on interest rate and currency swaps, options
and forward transactions: Fair values for swaps, options and forward
transactions were based on the use of valuation models that utilize, among other
things, current interest, foreign exchange and volatility rates, as applicable.
Securities purchased (sold) under agreements to resell (repurchase), at
contract value: As these securities (obligations) are short-term in nature, the
contract values approximate fair values.
Other invested assets: For assets for which market prices were not readily
available, fair valuation techniques were not applied as AIG believes it would
have to expend excessive costs for the benefits derived.
Policyholders' contract deposits: Fair values of policyholder contract
deposits were estimated using discounted cash flow calculations based upon
interest rates currently being offered for similar contracts with maturities
consistent with those remaining for the contracts being valued.
GIAs: Fair values of AIG's obligations under investment type agreements
were estimated using discounted cash flow calculations based on interest rates
currently being offered for similar agreements with maturities consistent with
those remaining for the agreements being valued. Additionally, AIG follows a
policy of minimizing interest rate risks associated with GIAs by entering into
swap transactions.
Securities and spot commodities sold but not yet purchased: The carrying
amounts for the financial instruments approximate fair values. Fair values for
spot commodities sold short were based on current market prices.
Trust deposits and deposits due to banks and other depositors: To the
extent certain amounts are not demand deposits or certificates of deposit which
mature in more than one year, fair values were not calculated as AIG believes it
would have to expend excessive costs for the benefits derived.
Commercial paper: The carrying amount of AIG's commercial paper borrowings
approximates fair value.
Notes, bonds, loans and mortgages payable: Where practical, the fair values
of these obligations were estimated using discounted cash flow calculations
based upon AIG's current incremental borrowing rates for similar types of
borrowings with maturities consistent with those remaining for the debt being
valued.
The carrying values and fair values of AIG's financial instruments at
December 31, 2000 and December 31, 1999 and
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13. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
the average fair values with respect to derivative positions during 2000 and
1999 were as follows:
(IN MILLIONS)
-----------------------------------------------------------------------------------------------------------------------------
2000 1999
------------------------------- -------------------------------
AVERAGE AVERAGE
CARRYING FAIR FAIR CARRYING FAIR FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-----------------------------------------------------------------------------------------------------------------------------
Assets:
Fixed maturities $166,142 $166,662 $ -- $150,769 $150,893 $ --
Equity securities 8,012 8,012 -- 7,387 7,387 --
Mortgage loans on real estate, policy and collateral
loans 18,596 18,869 -- 18,195 17,934 --
Securities available for sale 14,669 14,669 13,489 12,954 12,954 11,992
Finance receivables, net of allowance 11,378 10,897 10,634 10,570
Trading securities 7,347 7,347 5,063 4,391 4,391 5,438
Spot commodities 363 363 557 683 683 536
Unrealized gain on interest rate and currency swaps,
options and forward transactions 10,235 10,235 8,985 7,931 7,931 8,045
Trading assets 7,045 7,045 7,792 5,793 5,793 5,297
Securities purchased under agreements to resell 14,991 14,991 -- 10,897 10,897 --
Other invested assets 13,486 13,486 -- 9,978 9,978 --
Short-term investments 6,502 6,502 -- 7,683 7,683 --
Cash 522 522 -- 426 426 --
Liabilities:
Policyholders' contract deposits 99,327 99,137 -- 92,883 91,600 --
Borrowings under obligations of guaranteed investment
agreements 13,595 14,260 -- 9,430 9,308 --
Securities sold under agreements to repurchase 11,308 11,308 -- 6,116 6,116 --
Trading liabilities 4,352 4,352 3,953 3,821 3,821 4,177
Securities and spot commodities sold but not yet
purchased 7,701 7,701 7,831 6,413 6,413 6,314
Unrealized loss on interest rate and currency swaps,
options and forward transactions 8,581 8,581 8,278 8,624 8,624 8,630
Trust deposits and deposits due to banks and other
depositors 1,895 1,915 -- 2,175 2,163 --
Commercial paper 13,047 13,047 -- 10,825 10,825 --
Notes, bonds, loans and mortgages payable 27,681 27,245 -- 26,055 25,511 --
-----------------------------------------------------------------------------------------------------------------------------
Off-balance sheet financial instruments: Financial instruments which are
not currently recognized in the consolidated balance sheet of AIG are
principally commitments to extend credit and financial guarantees. The
unrecognized fair values of these instruments represent fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
current agreements and the counterparties' credit standings. No valuation was
made as AIG believes it would have to expend excessive costs for the benefits
derived.
14. STOCK COMPENSATION PLANS
(a) At December 31, 2000, AIG and AGC each had two types of stock-based
compensation plans. One type was a stock option plan; the other, an employee
stock purchase plan. AIG and AGC applied APB Opinion 25 "Accounting for Stock
Issued to Employees" and related Interpretations (APB 25) in accounting for each
plan. Accordingly, no compensation costs have been recognized for the plans.
Had compensation costs for these plans been determined consistent with the
method of Statement of Financial Accounting Standards No. 123 "Accounting for
Awards of Stock Based Compensation to Employees" (FASB 123), AIG's net income
and earnings per share for the years ended December 31, 2000, 1999 and 1998
would have been reduced to the pro forma amounts as follows:
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
-------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------
Net income:
As reported(a) $6,639 $6,186 $5,046
Pro forma 6,545 6,130 4,988
Earnings per
share -- diluted(b)(c):
As reported $ 2.52 $ 2.34 $ 1.92
Pro forma 2.48 2.32 1.91
-------------------------------------------------------------
(a) Post merger amounts.
(b) Includes SunAmerica Inc. shares which were exchanged for AIG shares at an
exchange ratio of 0.855 shares of AIG common stock for each share of
SunAmerica Inc. common stock for 1998.
(c) Includes AGC shares which were exchanged for AIG shares at an exchange ratio
of 0.5790 shares of AIG common stock for each share of AGC common stock for
each year presented.
(i) STOCK OPTION PLAN: On September 15, 1999, the AIG Board of Directors
adopted a 1999 stock option plan (the 1999 Plan), which provides that options to
purchase a maximum of 15,000,000 shares of common stock can be granted to
certain key employees and members of the Board of Directors at prices not less
64
66
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American International Group, Inc. and Subsidiaries
14. STOCK COMPENSATION PLANS (continued)
than fair market value at the date of grant. The 1999 Plan limits the maximum
number of shares as to which stock options may be granted to any employee in any
one year to 375,000 shares. Options granted under this Plan expire not more than
10 years from the date of the grant. Options with respect to 13,500 shares and
12,000 shares were granted to non-employee members of the Board of Directors on
September 15, 1999 and May 17, 2000, respectively. These options become
exercisable on the first anniversary of the date of grant, expire 10 years from
the date of grant and do not qualify for Incentive Stock Option Treatment under
the Economic Recovery Tax Act of 1981 (ISO Treatment). The Plan, and the options
previously granted thereunder, were approved by the shareholders at the 2000
Annual Meeting of Shareholders. At December 31, 2000, 12,842,155 shares were
reserved for future grants under the 1999 Plan. The 1999 Plan superseded the
1991 employee stock option plan (the 1991 Plan) and the previously superseded
1987 employee stock option plan (the 1987 Plan), although outstanding options
granted under both the 1991 Plan and the 1987 Plan continue in force until
exercise or expiration. At December 31, 2000, there were 15,991,621 shares
reserved for issuance under the 1999, 1991, and 1987 Plans.
During 2000 and 1999, AIG granted options with respect to 413,500 shares
and 574,500 shares, respectively, which become exercisable on the fifth
anniversary of the date of grant and expire 10 years from the date of grant.
These options do not qualify for ISO Treatment. The agreements with respect to
all other options granted to employees under these plans provide that 25 percent
of the options granted become exercisable on the anniversary of the date of
grant in each of the four years following that grant and expire 10 years from
the date of the grant. As of December 31, 2000, outstanding options granted with
respect to 8,875,310 shares qualified for ISO Treatment.
At January 1, 1999, the merger date, SunAmerica Inc. had five stock-based
compensation plans pursuant to which options, restricted stock and deferred
share and share unit obligations had been issued and remained outstanding.
Options granted under these plans had an exercise price equal to the market
price on the date of grant, had a maximum term of ten years and generally became
exercisable ratably over a five-year period. Substantially all of the SunAmerica
Inc. options outstanding at the merger date became fully vested on that date and
were converted into options to purchase AIG common stock at the exchange ratio
of 0.855 shares of AIG common stock for each share of SunAmerica Inc. common
stock. No further options can be granted under the SunAmerica Inc. plans, but
outstanding options so converted continue in force until exercise or expiration.
At December 31, 2000, there were 20,574,062 shares of AIG common stock reserved
for issuance on exercise of options under these plans. None of these options
qualified for ISO Treatment as of December 31, 2000.
During 1999, AIG issued 1,009,968 shares of AIG common stock which vested
on the effectiveness of the merger with SunAmerica Inc., and an additional
993,031 shares were issued pursuant to deferred share and share unit
obligations. During 2000, deferred share and share unit obligations with respect
to an additional 1,224,214 shares of AIG common stock vested, 142,105 shares
were issued pursuant to deferred share and share unit obligations and an
additional 1,082,109 shares were delivered into a trust in connection with a
deferred compensation plan. No additional deferred share or share unit
obligations may be granted under the SunAmerica plans. As of December 31, 2000,
deferred share and share unit obligations representing 173,615 shares were
outstanding but not yet vested.
In 1999, the AIG Board of Directors amended the AIG stock option plans to
allow deferral of delivery of AIG shares otherwise deliverable upon the exercise
of an option to a date or dates specified by the optionee upon the request of an
optionee. During 2000, options with respect to 760,070 shares were exercised
with delivery deferred. At December 31, 2000, optionees had made valid elections
to defer delivery of 858,703 shares of AIG common stock upon exercise of options
expiring during 2001.
As a result of the acquisition of HSB in November 2000, HSB options
outstanding at the acquisition date were fully vested and were converted into
options to purchase AIG common stock at the exchange ratio of 0.4178 shares of
AIG common stock for each share of HSB common stock. No further options can be
granted under the HSB option plans, but outstanding options so converted
continue in force until exercise or expiration. At December 31, 2000, there were
1,605,468 shares of AIG common stock reserved for issuance under the HSB option
plans, none of which qualified for ISO Treatment.
65
67
14. STOCK COMPENSATION PLANS (continued)
Additional information with respect to AIG's plans at December 31, 2000,
and changes for the three years then ended, were as follows:
---------------------------------------------------------------------------------------------------------------------------------
2000 1999(A) 1998
---------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------------------------------------------------------------------------------------------------------------------------------
Shares Under Option:
Outstanding at beginning of year 41,415,126 $23.29 44,583,495 $19.87 17,456,277 $17.41
Granted 2,179,220 95.48 2,748,556 62.43 1,716,222 46.63
Assumed upon acquisition from HSB 1,605,468 81.43 -- -- -- --
Exercised (5,796,592) 13.80 (5,673,366) 14.97 (2,236,634) 9.77
Exercised, delivery deferred (760,070) 3.06 -- -- -- --
Forfeited (472,001) 36.70 (243,559) 31.97 (281,071) 24.99
---------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 38,171,151 $31.53 41,415,126 $23.29 16,654,794 $21.33
---------------------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 32,778,411 $24.87 35,973,468 $19.10 11,779,257 $15.13
---------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value per
share of options granted $38.76 $26.00 $16.36
---------------------------------------------------------------------------------------------------------------------------------
(a) Includes those options that vested January 1, 1999 as a result of the merger
of SunAmerica Inc. with and into AIG.
In addition, at December 31, 2000, options to purchase 403,595 shares at a
weighted average exercise price of $19.81 had been previously granted to AIG
non-employee directors and remained outstanding.
Information about stock options outstanding at December 31, 2000, is
summarized as follows:
---------------------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -----------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE REMAINING AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES: OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
---------------------------------------------------------------------------------------------------------------------------------
$1.46 -- 7.67 6,216,737 3.1 years $ 4.87 6,216,737 $ 4.87
8.64 -- 14.44 5,487,959 3.2 years 11.33 5,487,959 11.33
15.25 -- 22.28 5,502,345 5.2 years 17.49 5,502,345 17.49
23.41 -- 29.45 5,390,113 6.5 years 25.12 5,389,228 25.12
31.02 -- 37.87 6,000,473 7.6 years 36.94 5,589,123 36.88
41.51 -- 63.40 5,240,479 8.3 years 53.39 2,985,681 51.59
66.80 -- 100.57 4,333,045 8.6 years 87.26 1,607,338 81.43
---------------------------------------------------------------------------------------------------------------------------------
38,171,151 $31.53 32,778,411 $24.87
---------------------------------------------------------------------------------------------------------------------------------
The fair values of stock options granted during the years ended December
31, 2000, 1999 and 1998 were $85 million, $71 million and $28 million,
respectively. The fair value of each option is estimated on the date of the
grant using the Black-Scholes option-pricing model.
The following weighted average assumptions were used for grants in 2000,
1999 and 1998, respectively: dividend yields of 0.17 percent, 0.20 percent and
0.24 percent; expected volatilities of 27.0 percent, 25.0 percent and 22.0
percent; risk-free interest rates of 5.42 percent, 5.33 percent and 4.73 percent
and expected terms of 7 years.
Using the Black-Scholes option-pricing model applicable to SunAmerica Inc.
for 1998, the fair value of stock options granted by SunAmerica Inc. was $49
million.
(ii) EMPLOYEE STOCK PURCHASE PLAN: AIG's 1996 Employee Stock Purchase Plan
was adopted at its 1996 shareholders' meeting and became effective as of July 1,
1996. Eligible employees may receive privileges to purchase up to an aggregate
of 4,218,750 shares of AIG common stock, at a price equal to 85 percent of the
fair market value on the date of the grant of the purchase privilege. Purchase
privileges are granted annually and were originally limited to the number of
whole shares that could be purchased by an amount equal to 5 percent of an
employee's annual salary or $5,500, whichever was less. Beginning with the
January 1, 1998 subscription, the maximum allowable purchase limitation
increased to 10 percent of an employee's annual salary or $10,000 per year,
whichever is less, and the eligibility requirement was reduced from two years to
one year.
66
68
--------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
14. STOCK COMPENSATION PLANS (continued)
There were 742,773 shares, 892,929 shares and 638,284 shares issued under
the 1996 plan at weighted average prices of $52.66, $38.24 and $28.74 for the
years ended December 31, 2000, 1999 and 1998, respectively. The excess or
deficit of the proceeds over the par value or cost of the common stock issued
under these plans was credited or charged to additional paid-in capital.
As of December 31, 2000, there were 542,479 shares of common stock
subscribed to at a weighted average price of $69.11 per share pursuant to grants
of privileges under the 1996 plan. There were 988,605 shares available for the
grant of future purchase privileges under the 1996 plan at December 31, 2000.
The fair values of purchase privileges granted during the years ended
December 31, 2000, 1999 and 1998 were $13 million, $13 million and $10 million,
respectively. The weighted average fair values per share of those purchase
rights granted in 2000, 1999 and 1998 were $19.36, $14.04 and $10.31,
respectively. The fair value of each purchase right is estimated on the date of
the subscription using the Black-Scholes model.
The following weighted average assumptions were used for grants in 2000,
1999 and 1998, respectively: dividend yields of 0.17 percent, 0.20 percent and
0.24 percent; expected volatilities of 34.0 percent, 34.0 percent and 33.0
percent; risk-free interest rates of 5.95 percent, 5.33 percent and 5.26
percent; and expected terms of 1 year.
During 1999, there were 42,577 shares of AIG common stock issued under the
SunAmerica Inc. employee stock purchase plan at a weighted average price of
$32.60. There are no further shares available for grant under this plan.
(b) The following are disclosures with respect to the stock compensation plans
of AGC prior to its acquisition by AIG. Both share information and exercise
price information have been recalculated to reflect the exchange ratio of 0.5790
shares of AIG common stock for each outstanding share of AGC's common stock. All
of AGC's options vested immediately prior to the closing date of the
acquisition.
AGC's long-term incentive plans provide for the award of stock options,
restricted stock awards, and performance awards to key employees and directors.
Stock options constitute the majority of awards. AGC recognized no expense for
stock options since the market price equaled the exercise price at the grant
date.
For restricted stock and performance awards, the grant date market value
was amortized to expense over the vesting period. AGC adjusted the expense to
reflect changes in market value of AGC's common stock and anticipated
performance levels for those awards with performance criteria.
AGC stock option activity was as follows:
2000 1999 1998
------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE EXERCISE OPTIONS EXERCISE
(000'S) PRICE OPTIONS PRICE (000'S) PRICE
-----------------------------------------------------------------------------------
Balance at
January 1 11,405 $48.91 6,671 $38.70 4,212 $29.78
Granted 5,436 55.32 5,974 58.98 2,918 51.66
For acquisition -- -- -- -- 1,602 21.40
Exercised (1,084) 35.42 (674) 33.20 (1,731) 22.14
Forfeited (658) 56.41 (566) 53.35 (330) 42.06
-----------------------------------------------------------------------------------
Balance at December
31 15,099 $51.87 11,405 $48.91 6,671 $38.70
-----------------------------------------------------------------------------------
Exercisable at
December 31 5,898 $44.87 3,901 $34.30 2,914 $27.08
-----------------------------------------------------------------------------------
Weighted average fair
value per share of
options granted $16.93 $14.59 $13.20
-----------------------------------------------------------------------------------
Options could not be exercised within at least six months of, nor after 10
years from, grant date. For certain stock options, one reload option was granted
for each previously-owned share of common stock tendered to exercise options.
Reload options vested immediately and were exercisable for the remaining term of
the original options. Information about options outstanding at December 31, 2000
was as follows:
OUTSTANDING EXERCISABLE
---------------------------------------------------
AVERAGE AVERAGE AVERAGE
RANGE OF OPTIONS REMAINING EXERCISE OPTIONS EXERCISE
EXERCISE PRICES (000'S) LIFE PRICE (000'S) PRICE
---------------------------------------------------------------------
$16.17 - $25.89 914 3 years $19.78 914 $19.78
25.91 - 34.53 637 5 years 29.59 637 29.59
34.54 - 43.16 893 6 years 37.79 831 37.53
43.18 - 51.80 2,217 7 years 51.02 1,414 51.16
51.81 - 60.43 10,117 9 years 57.20 1,959 58.67
60.45 - 69.07 291 8 years 63.92 124 64.02
69.08 - 77.70 30 8 years 69.67 18 69.24
---------------------------------------------------------------------
Total 15,099 $51.87 5,897 $44.87
---------------------------------------------------------------------
The average fair values of the options granted were $16.93 in 2000, $14.59
in 1999, and $13.20 in 1998. AGC estimated the fair value of each option at the
grant date using a Black-Scholes option pricing model and the following
assumptions:
2000 1999 1998
------------------------------------------------------------------
Dividend yield 2.5% 2.5% 2.5%
Expected volatility 27.6% 24.4% 23.0%
Risk-free interest rate 6.7% 4.9% 5.7%
Expected life 6 YEARS 6 years 6 years
------------------------------------------------------------------
15. EMPLOYEE BENEFITS
(a) Employees of AIG, its subsidiaries and certain affiliated companies,
including employees in foreign countries, are generally covered under various
funded and insured pension plans. Eligibility
67
69
15. EMPLOYEE BENEFITS (continued)
for participation in the various plans is based on either completion of a
specified period of continuous service or date of hire, subject to age
limitation.
AIG's U.S. retirement plan is a qualified, noncontributory, defined benefit
plan. All qualified employees, other than those of SunAmerica, AGC, 21st Century
and HSB who have attained age 21 and completed twelve months of continuous
service are eligible to participate in this plan. An employee with 5 or more
years of service is entitled to pension benefits beginning at normal retirement
at age 65. Benefits are based upon a percentage of average final compensation
multiplied by years of credited service limited to 44 years of credited service.
The average final compensation is subject to certain limitations. Annual funding
requirements are determined based on the "projected unit credit" cost method
which attributes a pro rata portion of the total projected benefit payable at
normal retirement to each year of credited service.
AIG has adopted a Supplemental Executive Retirement Plan (Supplemental
Plan) to provide additional retirement benefits to designated executives and key
employees. Under the Supplemental Plan, the annual benefit, not to exceed 60
percent of average final compensation, accrues at a percentage of average final
pay multiplied for each year of credited service reduced by any benefits from
the current and any predecessor retirement plans, Social Security, if any, and
from any qualified pension plan of prior employers. The Supplemental Plan also
provides a benefit equal to the reduction in benefits payable under the AIG
retirement plan as a result of Federal limitations on benefits payable
thereunder. Currently, the Supplemental Plan is unfunded.
Eligibility for participation in the various non-U.S. retirement plans is
either based on completion of a specified period of continuous service or date
of hire, subject to age limitation. Where non-U.S. retirement plans are defined
benefit plans, they are generally based on the employees' years of credited
service and average compensation in the years preceding retirement.
In addition to AIG's defined benefit pension plan, AIG and its subsidiaries
provide a postretirement benefit program for medical care and life insurance,
domestically and in certain foreign countries. Eligibility in the various plans
is generally based upon completion of a specified period of eligible service and
reaching a specified age. Benefits vary by geographic location.
AIG's U.S. postretirement medical and life insurance benefits are based
upon the employee electing immediate retirement and having a minimum of ten
years of service. Retirees and their dependents who were age 65 by May 1, 1989
participate in the medical plan at no cost. Employees who retired after May 1,
1989 and on or prior to January 1, 1993 pay the active employee premium if under
age 65 and 50 percent of the active employee premium if over age 65. Retiree
contributions are subject to adjustment annually. Other cost sharing features of
the medical plan include deductibles, coinsurance and Medicare coordination and
a lifetime maximum benefit of $1.5 million. The lifetime maximum benefit of the
medical plan was increased to $2.0 million effective January 1, 2000. The
maximum life insurance benefit prior to age 70 is $32,500, with a maximum of
$25,000 thereafter.
Effective January 1, 1993, both plans' provisions were amended. Employees
who retire after January 1, 1993 are required to pay the actual cost of the
medical benefits premium reduced by a credit which is based on years of service
at retirement. The life insurance benefit varies by age at retirement from
$5,000 for retirement at ages 55 through 59; $10,000 for retirement at ages 60
through 64 and $15,000 for retirement at ages 65 and over.
(b) AIG sponsors a voluntary savings plan for domestic employees (a 401(k)
plan), which, during the three years ended December 31, 2000, provided for
salary reduction contributions by employees and matching contributions by AIG of
up to 6 percent of annual salary depending on the employees' years of service.
(c) SunAmerica sponsors a voluntary savings plan for its employees (the
SunAmerica 401(k) plan), which, during the three years ended December 31, 2000,
provided for salary reduction contributions by qualifying employees and matching
contributions by SunAmerica of up to 4 percent of qualifying employees' annual
salaries. Under an Executive Savings Plan, designated SunAmerica executives also
could defer up to 90 percent of cash compensation during the three years ended
December 31, 2000, and SunAmerica matched 4 percent of the participants' base
salaries deferred.
(d) AGC sponsors a voluntary savings plan for its employees (the AGC 401(k)
plan), which provides for salary reduction contributions by employees and
matching contributions by AGC of up to 6 percent of annual salary.
(e) HSB sponsors a voluntary savings plan for its employees (the HSB 401(k)
plan), which provides for salary reduction contributions by employees and
matching contributions by HSB of up to 6 percent of annual salary.
(f) AIG has certain benefits provided to former or inactive employees who
are not retirees. Certain of these benefits are insured and expensed currently;
other expenses are provided for currently. Such uninsured expenses include long
and short-term disability medical and life insurance continuation, short-term
disability income continuation and COBRA medical subsidies. The provision for
these benefits at December 31, 2000 was $6 million. The incremental expense was
insignificant.
The following table sets forth the change in benefit obligation, change in
plan assets and weighted average assumptions associated with various pension
plan and postretirement benefits. The amounts
68
70
--------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
15. EMPLOYEE BENEFITS (continued)
are recognized in the accompanying consolidated balance sheet as of December 31,
2000 and 1999:
(IN MILLIONS)
--------------------------------------------------------------------------------
PENSION BENEFITS OTHER BENEFITS
------------------------------ ----------------------------
NON-U.S. U.S. NON-U.S. U.S.
2000 PLANS PLANS TOTAL PLANS PLANS TOTAL
----------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 476 $ 1,212 $1,688 $ 8 $ 188 $ 196
Service cost 32 57 89 1 4 5
Interest cost 15 100 115 -- 15 15
Participant contributions 5 -- 5 -- -- --
Actuarial loss 8 88 96 1 31 32
Plan amendments and mergers -- 9 9 -- (16) (16)
Benefits paid (24) (51) (75) -- (25) (25)
Effect of foreign currency fluctuation (50) -- (50) -- -- --
----------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 462 $ 1,415 $1,877 $ 10 $ 197 $ 207
----------------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 300 $ 1,883 $2,183 $ -- $ -- $ --
Actual return on plan assets net of expenses (17) 91 74 -- -- --
Employer contributions 23 5 28 -- 26 26
Participant contributions 5 -- 5 -- -- --
Benefits paid (25) (51) (76) -- (26) (26)
Asset adjustment -- (1) (1) -- -- --
Effect of foreign currency fluctuation (31) -- (31) -- -- --
Plan mergers -- 9 9 -- -- --
----------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year* $ 255 $ 1,936 $2,191 $ -- $ -- $ --
----------------------------------------------------------------------------------------------------------------------------
Reconciliation of funded status:
Funded status $ (207) $ 521 $ 314 $ (10) $ (197) $(207)
Unrecognized actuarial (gain)/loss 44 (297) (253) -- 16 16
Unrecognized transition obligation 9 4 13 -- -- --
Unrecognized prior service cost 5 23 28 -- (43) (43)
Benefit payments -- -- -- -- 3 3
----------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end $ (149) $ 251 $ 102 $ (10) $ (221) $(231)
----------------------------------------------------------------------------------------------------------------------------
Amounts recognized in the statement of financial position
consist of:
Prepaid benefit cost $ 1 $ 393 $ 394 $ -- $ -- $ --
Accrued benefit liability (182) (145) (327) (10) (221) (231)
Intangible asset 32 3 35 -- -- --
----------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end $ (149) $ 251 $ 102 $ (10) $ (221) $(231)
----------------------------------------------------------------------------------------------------------------------------
Weighted-average assumptions as of December 31,
Discount rate 3.0-10.0% 7.5-8.0% 7.0-7.5% 7.5-8.0%
Expected return on plan assets 3.5-13.0 9.0-10.4 N/A N/A
Rate of compensation increase 2.0- 8.0 4.5-5.0 N/A N/A
----------------------------------------------------------------------------------------------------------------------------
For measurement purposes, an 8.5 percent annual rate of increase in the per
capita cost of covered healthcare benefits was assumed for 2000.
The rate was assumed to decrease gradually to 5.0 percent for 2007 and remain at
that level thereafter.
* Plan assets are invested primarily in fixed-income securities and listed
stocks.
69
71
15. EMPLOYEE BENEFITS (continued)
(IN MILLIONS)
--------------------------------------------------------------------------------
PENSION BENEFITS OTHER BENEFITS
------------------------------- -----------------------------
NON-U.S. U.S. NON-U.S. U.S.
1999 PLANS PLANS TOTAL PLANS PLANS TOTAL
------------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 427 $ 1,249 $1,676 $ 7 $ 210 $ 217
Service cost 37 62 99 1 5 6
Interest cost 17 90 107 -- 14 14
Participant contributions 5 -- 5 -- -- --
Prior service costs (3) -- (3) -- -- --
Actuarial gain (22) (142) (164) -- (12) (12)
Benefits paid (22) (47) (69) -- (23) (23)
Effect of foreign currency fluctuation 37 -- 37 -- -- --
Removal of Anthem Participant -- -- -- -- (6) (6)
------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 476 $ 1,212 $1,688 $ 8 $ 188 $ 196
------------------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 208 $ 1,679 $1,887 $ -- $ -- $ --
Asset adjustment -- (1) (1) -- -- --
Actual return on plan assets net of expenses 66 238 304 -- -- --
Employer contributions 28 14 42 -- 23 23
Participant contributions 5 -- 5 -- -- --
Benefits paid (22) (47) (69) -- (23) (23)
Effect of foreign currency fluctuation 15 -- 15 -- -- --
------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year* $ 300 $ 1,883 $2,183 $ -- $ -- $ --
------------------------------------------------------------------------------------------------------------------------------
Reconciliation of funded status:
Funded status $ (176) $ 671 $ 495 $ (8) $ (188) $(196)
Unrecognized actuarial (gain)/loss 7 (475) (468) -- (15) (15)
Unrecognized transition obligation 12 5 17 -- -- --
Unrecognized prior service cost 9 23 32 -- (48) (48)
Benefit payments -- -- -- -- 3 3
------------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end $ (148) $ 224 $ 76 $ (8) $ (248) $(256)
------------------------------------------------------------------------------------------------------------------------------
Amounts recognized in the statement of financial position
consist of:
Prepaid benefit cost $ 3 $ 335 $ 338 $ -- $ -- $ --
Accrued benefit liability (184) (114) (298) (8) (248) (256)
Intangible asset 33 3 36 -- -- --
------------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end $ (148) $ 224 $ 76 $ (8) $ (248) $(256)
------------------------------------------------------------------------------------------------------------------------------
Weighted-average assumptions as of December 31,
Discount rate 3.0-10.0% 7.8-8.0% 7.0-7.75% 7.8-8.0%
Expected return on plan assets 3.5-13.0 9.0-10.4 N/A N/A
Rate of compensation increase 2.0- 8.0 4.3-5.0 N/A N/A
------------------------------------------------------------------------------------------------------------------------------
For measurement purposes, a 9.0 percent annual rate of increase in the per
capita cost of covered healthcare benefits was assumed for 1999.
The rate was assumed to decrease to 5.0 percent for 2007 and remain at that
level thereafter.
* Plan assets are invested primarily in fixed-income securities and listed
stocks.
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72
--------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
15. EMPLOYEE BENEFITS (continued)
The net benefit cost for the years ended December 31, 2000, 1999, and 1998
included the following components:
(IN MILLIONS)
--------------------------------------------------------------------------------
PENSION BENEFITS OTHER BENEFITS
------------------------------ ------------------------------
NON-U.S. U.S. NON-U.S. U.S.
PLANS PLANS TOTAL PLANS PLANS TOTAL
----------------------------------------------------------------------------------------------------------------------------
2000
Components of net period benefit cost:
Service cost $ 32 $ 57 $ 89 $ 1 $ 4 $ 5
Interest cost 15 101 116 -- 16 16
Expected return on assets (12) (172) (184) -- -- --
Amortization of prior service cost 2 2 4 -- (4) (4)
Amortization of transitional liability 2 1 3 -- -- --
Recognized actuarial loss 2 (11) (9) -- -- --
----------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 41 $ (22) $ 19 $ 1 $16 $17
----------------------------------------------------------------------------------------------------------------------------
1999
Components of net period benefit cost:
Service cost $ 36 $ 62 $ 98 $ 1 $ 5 $ 6
Interest cost 17 90 107 -- 14 14
Expected return on assets (10) (152) (162) -- -- --
Amortization of prior service cost 3 2 5 -- (4) (4)
Amortization of transitional liability 2 1 3 -- -- --
Recognized actuarial loss 3 1 4 -- -- --
----------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 51 $ 4 $ 55 $ 1 $15 $16
----------------------------------------------------------------------------------------------------------------------------
1998
Components of net period benefit cost:
Service cost $ 32 $ 53 $ 85 $ 1 $ 3 $ 4
Interest cost 16 79 95 1 14 15
Expected return on assets (9) (124) (133) -- -- --
Amortization of prior service cost 2 3 5 -- (4) (4)
Amortization of transitional (asset)/liability 2 -- 2 (1) -- (1)
Recognized actuarial loss 3 1 4 -- -- --
----------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 46 $ 12 $ 58 $ 1 $13 $14
----------------------------------------------------------------------------------------------------------------------------
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $302 million, $258 million and $51 million,
respectively, as of December 31, 2000 and $292 million, $251 million and $54
million as of December 31, 1999.
On December 31, 1998, AIG amended its retirement and postretirement
healthcare plan to provide increased benefits to certain employees who retire
prior to age 65. Assumed healthcare cost trend rates have a significant effect
on the amounts reported for the healthcare plan.
71
73
15. EMPLOYEE BENEFITS (continued)
A one-percentage-point change in assumed healthcare cost trend rates would
have the following effects:
(IN MILLIONS)
------------------------------------------------------------------
1-PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
--------------------------------------------------------------
Effect on total of service
and interest cost
components $ 1 $ --
Effect on postretirement
benefit obligation 7 (6)
--------------------------------------------------------------
16. LEASES
(a) AIG and its subsidiaries occupy leased space in many locations under various
long-term leases and have entered into various leases covering the long-term use
of data processing equipment.
At December 31, 2000, the future minimum lease payments under operating
leases were as follows:
(IN MILLIONS)
------------------------------------------------------------------
2001 $ 421
2002 332
2003 255
2004 217
2005 165
Remaining years after 2005 589
------------------------------------------------------------
Total $1,979
------------------------------------------------------------
Rent expense approximated $412 million, $390 million and $345 million for
the years ended December 31, 2000, 1999 and 1998 respectively.
(b) Minimum future rental income on noncancelable operating leases of
flight equipment which have been delivered at December 31, 2000 was as follows:
(IN MILLIONS)
------------------------------------------------------------
2001 $ 1,875
2002 1,667
2003 1,425
2004 1,224
2005 923
Remaining years after 2005 3,019
------------------------------------------------------------
Total $10,133
------------------------------------------------------------
Flight equipment is leased, under operating leases, with remaining terms
ranging from one to 14 years.
17. OWNERSHIP AND TRANSACTIONS WITH RELATED PARTIES
(a) OWNERSHIP: The directors and officers of AIG, together with C.V. Starr &
Co., Inc. (Starr), a private holding company, The Starr Foundation and Starr
International Company, Inc. (SICO), a private holding company, owned or
otherwise controlled approximately 24 percent of the voting stock of AIG at
December 31, 2000. Six directors of AIG also serve as directors of Starr and
SICO.
(b) TRANSACTIONS WITH RELATED PARTIES: During the ordinary course of
business, AIG and its subsidiaries pay commissions to Starr and its subsidiaries
for the production and management of insurance business. There are no
significant receivables from/payables to related parties at December 31, 2000.
Net commission payments to Starr aggregated approximately $60 million in 2000,
$45 million in 1999 and $46 million in 1998, from which Starr is required to pay
commissions due originating brokers and its operating expenses. AIG also
received approximately $13 million in 2000, $11 million in 1999 and $13 million
in 1998 from Starr and paid approximately $41,000 in 2000, $42,000 in 1999 and
$37,000 in 1998 to Starr in rental fees. AIG also received approximately $1
million in 2000, 1999 and 1998 from SICO and paid approximately $1 million in
each of the years 2000, 1999 and 1998 to SICO as reimbursement for services
rendered at cost. AIG also paid to SICO $4 million in 2000, 1999 and 1998 in
rental fees.
18. SEGMENT INFORMATION
(a) AIG's operations are conducted principally through four business segments.
These segments and their respective operations are as follows:
General Insurance: AIG's general insurance subsidiaries are multiple line
companies writing substantially all lines of property and casualty insurance.
DBG writes substantially all classes of business insurance accepting such
business mainly from insurance brokers. This provides DBG the opportunity to
select specialized markets and retain underwriting control. Any licensed broker
is able to submit business to DBG without the traditional agent-company
contractual relationship, but such broker usually has no authority to commit DBG
to accept a risk. Transatlantic's and HSB's domestic operations are included in
this group.
AIG's Foreign General insurance group accepts risks primarily underwritten
through AIU, a marketing unit consisting of wholly owned agencies and insurance
entities. The Foreign General insurance group also includes business written by
AIG's foreign-based insurance subsidiaries for their own accounts. The Foreign
General group uses various marketing methods to write both business and personal
lines insurance with certain refinements for local laws, customs and needs. AIU
operates in over 70 countries in Asia, the Pacific Rim, Europe, Africa, Middle
East and Latin America. Transatlantic's foreign operations are included in this
group.
Life Insurance: AIG's life insurance subsidiaries offer a wide range of
traditional insurance and financial and investment products. Traditional
products consist of individual and group life, annuity, endowment and accident
and health policies. Financial and investment products consist of single premium
annuity, variable annuities, guaranteed investment contracts, universal life and
pensions.
AIG's three principal overseas life operations are ALICO, AIA and Nan Shan.
ALICO is incorporated in Delaware and all of its business is written outside of
the United States. ALICO has operations either directly or through subsidiaries
in approximately
72
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--------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
18. SEGMENT INFORMATION (continued)
50 countries located in Europe, Africa, Latin America, the Caribbean, the Middle
East, and the Far East, with Japan being the largest territory. AIA operates
primarily in Hong Kong, Singapore, Malaysia and Thailand. Nan Shan operates in
Taiwan. AIG's domestic life operations are comprised of two separate operations,
the life insurance subsidiaries of AGC, including AIG's domestic life companies,
and the life insurance subsidiaries of SunAmerica.
Both of these operations sell primarily financial and investment type
products. Additionally, the life insurance subsidiaries of AGC sell traditional
life products.
Financial Services: AIG's financial services subsidiaries engage in
diversified financial products and services including premium financing, banking
services and consumer finance services.
ILFC engages primarily in the acquisition of new and used commercial jet
aircraft and the leasing and remarketing of such aircraft to airlines around the
world.
AIGFP structures financial transactions, including long-dated interest rate
and currency swaps and structured borrowings through notes, bonds and guaranteed
investment agreements.
AGF provides a wide variety of consumer finance products, including
mortgages, consumer loans, retail sales finance and credit related insurance to
customers in the United States.
AIGTG engages in various commodities trading, foreign exchange trading,
interest rate swaps and market making activities.
Asset Management: AIG's asset management operations offer a wide variety
of investment vehicles and services, including variable annuities, mutual funds
and investment asset management. Such products and services are offered to
individuals and institutions both domestically and internationally.
AIG's four principal asset management operations are SAAMCo, Global
Investment, Cap Partners and AGC's asset management operations through The
Variable Annuity Life Insurance Company (VALIC). SAAMCo develops and sells
variable annuities and other investment products, sells and manages mutual funds
and provides financial services. Global Investment manages third-party
institutional, retail and private equity funds invested assets on a global
basis, and provides custodial services. Cap Partners organizes, and manages the
invested assets of institutional investment funds and may also invest in such
funds. Each of these subsidiary operations receives fees for investment products
and services provided. VALIC provides tax qualified annuities to employees of
educational, healthcare and governmental entities.
(b) The following table summarizes the operations by major operating
segment for the years ended December 31, 2000, 1999 and 1998:
-----------------------------------------------------------------------------
OPERATING SEGMENTS -- 2000
-----------------------------------------------------------------------------
GENERAL LIFE FINANCIAL ASSET
(IN MILLIONS) INSURANCE INSURANCE SERVICES MANAGEMENT OTHER(A) CONSOLIDATED
------------------------------------------------------------------------------------------------------------------------------
Revenues(b) $ 20,146 $ 27,675 $ 5,954 $ 3,475 $ (215) $ 57,035
Interest revenue -- -- 3,557 94 -- 3,651
Interest expense 5 144 3,276 15 265 3,705
Realized capital gains (losses) 38 (162) -- -- (190) (314)
Operating income (loss) before minority
interest 3,524 4,822 1,678 1,161 (1,162) 10,023
Income taxes (benefits) 931 1,566 588 400 (514) 2,971
Depreciation expense 149 138 833 15 108 1,243
Capital expenditures 278 472 3,748 47 184 4,729
Identifiable assets 85,270 248,982 94,173 1,590 (3,344) 426,671
------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------
OPERATING SEGMENTS -- 1999
-----------------------------------------------------------------------------
GENERAL LIFE FINANCIAL ASSET
(IN MILLIONS) INSURANCE INSURANCE SERVICES MANAGEMENT OTHER(A) CONSOLIDATED
------------------------------------------------------------------------------------------------------------------------------
Revenues(b) $ 18,356 $ 24,837 $ 5,069 $ 3,112 $ (39) $ 51,335
Interest revenue -- -- 2,836 84 -- 2,920
Interest expense 8 159 2,616 5 234 3,022
Realized capital gains (losses) 295 (148) -- -- (44) 103
Operating income (loss) before minority
interest 3,481 4,210 1,432 920 (644) 9,399
Income taxes (benefits) 831 1,427 513 310 (248) 2,833
Depreciation expense 134 122 762 13 99 1,130
Capital expenditures 215 310 3,495 91 128 4,239
Identifiable assets 76,725 231,843 78,868 1,132 (4,883) 383,685
------------------------------------------------------------------------------------------------------------------------------
73
75
18. SEGMENT INFORMATION (continued)
-----------------------------------------------------------------------------
OPERATING SEGMENTS -- 1998
-----------------------------------------------------------------------------
GENERAL LIFE FINANCIAL ASSET
(IN MILLIONS) INSURANCE INSURANCE SERVICES MANAGEMENT OTHER(A) CONSOLIDATED
------------------------------------------------------------------------------------------------------------------------------
Revenues(b) $ 16,495 $ 22,008 $ 4,653 $ 2,720 $ 91 $ 45,967
Interest revenue -- -- 2,557 63 -- 2,620
Interest expense 7 184 2,347 14 217 2,769
Realized capital gains (losses) 205 (74) -- -- (1) 130
Operating income (loss) before minority
interest 2,928 3,596 1,181 688 (810) 7,583
Income taxes (benefits) 646 1,145 408 208 (217) 2,190
Equity in income of minority-owned insurance
operations 57 -- -- -- (17) 40
Depreciation expense 109 110 683 10 99 1,011
Capital expenditures 220 332 3,265 105 169 4,091
Identifiable assets 73,226 197,851 70,065 915 (3,274) 338,783
------------------------------------------------------------------------------------------------------------------------------
(a) Includes AIG Parent and other operations which are not required to be
reported separately, other income (deductions) -- net and adjustments and
eliminations.
(b) Represents the sum of general net premiums earned, life premium income, net
investment income, financial services commissions, transaction and other
fees, asset management commissions and other fees, equity in income of
minority-owned insurance operations and realized capital gains (losses).
(c) The following table summarizes AIG's general insurance operations by
major internal reporting group for the years ended December 31, 2000, 1999 and
1998:
GENERAL INSURANCE -- 2000
---------------------------------------------
DOMESTIC TOTAL
BROKERAGE FOREIGN GENERAL
(IN MILLIONS) GROUP GENERAL OTHER(A) INSURANCE
-----------------------------------------------------------------------------------------------------------
Net premiums written $ 8,805 $ 5,758 $2,963 $17,526
Net premiums earned 8,886 5,668 2,853 17,407
Losses & loss expenses incurred 7,419 3,595 2,090 13,104
Underwriting expenses 1,250 1,738 530 3,518
Adjusted underwriting profit(b) 217 335 233 785
Net investment income 1,793 625 283 2,701
Operating income before realized capital gains(c) 2,010 960 516 3,486
Depreciation expense 53 72 24 149
Capital expenditures 103 96 79 278
Identifiable assets 59,644 20,889 4,737 85,270
-----------------------------------------------------------------------------------------------------------
GENERAL INSURANCE -- 1999
---------------------------------------------
DOMESTIC TOTAL
BROKERAGE FOREIGN GENERAL
(IN MILLIONS) GROUP GENERAL OTHER(A) INSURANCE
-----------------------------------------------------------------------------------------------------------
Net premiums written $ 8,297 $ 5,368 $2,559 $16,224
Net premiums earned 7,788 5,281 2,475 15,544
Losses & loss expenses incurred 6,615 3,394 1,729 11,738
Underwriting expenses 1,106 1,586 445 3,137
Adjusted underwriting profit(b) 67 301 301 669
Net investment income 1,738 522 257 2,517
Operating income before realized capital gains(c) 1,805 823 558 3,186
Depreciation expense 39 73 22 134
Capital expenditures 79 80 56 215
Identifiable assets 54,007 18,588 4,130 76,725
-----------------------------------------------------------------------------------------------------------
74
76
--------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
18. SEGMENT INFORMATION (continued)
GENERAL INSURANCE -- 1998
---------------------------------------------
DOMESTIC TOTAL
BROKERAGE FOREIGN GENERAL
(IN MILLIONS) GROUP GENERAL OTHER(A) INSURANCE
-----------------------------------------------------------------------------------------------------------
Net premiums written $ 8,191 $ 4,610 $1,785 $14,586
Net premiums earned 8,002 4,439 1,657 14,098
Losses & loss expenses incurred 6,995 2,545 1,117 10,657
Underwriting expenses 1,218 1,378 314 2,910
Adjusted underwriting profit (loss)(b) (211) 516 226 531
Net investment income 1,570 438 184 2,192
Operating income before realized capital gains(c) 1,359 954 410 2,723
Equity in income of minority-owned insurance operations 57 -- -- 57
Depreciation expense 34 63 12 109
Capital expenditures 66 110 44 220
Identifiable assets 53,844 16,060 3,322 73,226
-----------------------------------------------------------------------------------------------------------
(a) Includes other operations which are not required to be reported separately
and adjustments and eliminations.
(b) Adjusted underwriting profit (loss) represents statutory underwriting profit
or loss adjusted primarily for changes in deferred acquisition costs.
(c) Realized capital gains are not deemed to be an integral part of AIG's
general insurance operations' internal reporting groups.
(d) The following table summarizes AIG's life insurance operations by major
internal reporting group for the years ended December 31, 2000, 1999 and 1998:
LIFE INSURANCE -- 2000
----------------------------------------------------
AIA TOTAL
AND DOMESTIC LIFE
(IN MILLIONS) ALICO NAN SHAN LIFE OTHER(A) INSURANCE
------------------------------------------------------------------------------------------------------------------
Premium income $ 4,135 $ 7,859 $ 4,818 $ 361 $ 17,173
Net investment income 1,362 1,688 7,467 147 10,664
Operating income before realized capital gains(b) 754 1,409 2,746 75 4,984
Depreciation expense 46 33 51 8 138
Capital expenditures 313 58 69 32 472
Identifiable assets 28,532 32,697 186,111 1,642 248,982
------------------------------------------------------------------------------------------------------------------
LIFE INSURANCE -- 1999
----------------------------------------------------
AIA TOTAL
AND DOMESTIC LIFE
(IN MILLIONS) ALICO NAN SHAN LIFE OTHER(A) INSURANCE
------------------------------------------------------------------------------------------------------------------
Premium income $ 3,714 $ 7,014 $ 4,485 $ 267 $ 15,480
Net investment income 1,222 1,357 6,796 130 9,505
Operating income before realized capital gains(b) 680 1,200 2,414 64 4,358
Depreciation expense 41 30 45 6 122
Capital expenditures 62 92 137 19 310
Identifiable assets 26,294 28,310 175,504 1,735 231,843
------------------------------------------------------------------------------------------------------------------
75
77
18. SEGMENT INFORMATION (continued)
LIFE INSURANCE -- 1998
----------------------------------------------------
AIA TOTAL
AND DOMESTIC LIFE
(IN MILLIONS) ALICO NAN SHAN LIFE OTHER(A) INSURANCE
------------------------------------------------------------------------------------------------------------------
Premium income $ 3,212 $ 6,052 $ 4,216 $ 245 $ 13,725
Net investment income 1,019 1,189 6,045 104 8,357
Operating income before realized capital gains(b) 576 1,040 2,005 49 3,670
Depreciation expense 31 25 49 5 110
Capital expenditures 201 64 56 11 332
Identifiable assets 23,495 23,860 149,109 1,387 197,851
------------------------------------------------------------------------------------------------------------------
(a) Includes other operations which are not required to be reported separately
and adjustments and eliminations.
(b) Realized capital gains are not deemed to be an integral part of AIG's life
insurance operations' internal reporting groups.
(e) The following table summarizes AIG's financial services operations by
major internal reporting group for the years ended December 31, 2000, 1999 and
1998:
FINANCIAL SERVICES -- 2000
------------------------------------------------------------------
TOTAL
FINANCIAL
(IN MILLIONS) ILFC AIGFP(A) AGF AIGTG OTHER(B) SERVICES
-----------------------------------------------------------------------------------------------------------------------------
Commissions, transaction and other fees(c) $ 2,441 $ 1,056 $ 1,902 $ 254 $ 301 $ 5,954
Interest revenue 38 1,540 1,619 46 314 3,557
Interest expense 824 1,552 694 25 181 3,276
Operating income (loss) 654 648 385 62 (71) 1,678
Depreciation expense 729 8 21 14 61 833
Capital expenditures 3,435 216 23 8 66 3,748
Identifiable assets 19,984 41,837 13,157 14,322 4,873 94,173
-----------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 1999
------------------------------------------------------------------
TOTAL
FINANCIAL
(IN MILLIONS) ILFC AIGFP(A) AGF AIGTG OTHER(B) SERVICES
-----------------------------------------------------------------------------------------------------------------------------
Commissions, transaction and other fees(c) $ 2,194 $ 737 $ 1,729 $ 227 $ 182 $ 5,069
Interest revenue 30 1,066 1,455 50 235 2,836
Interest expense 732 1,189 574 27 94 2,616
Operating income (loss) 590 482 351 109 (100) 1,432
Depreciation expense 664 6 19 10 63 762
Capital expenditures 3,366 11 42 11 65 3,495
Identifiable assets 17,854 33,965 12,301 9,960 4,788 78,868
-----------------------------------------------------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
18. SEGMENT INFORMATION (continued)
FINANCIAL SERVICES -- 1998
------------------------------------------------------------------
TOTAL
FINANCIAL
(IN MILLIONS) ILFC AIGFP(A) AGF AIGTG OTHER(B) SERVICES
-----------------------------------------------------------------------------------------------------------------------------
Commissions, transaction and other fees(c) $ 2,002 $ 550 $ 1,609 $ 374 $ 118 $ 4,653
Interest revenue 49 941 1,354 74 139 2,557
Interest expense 694 997 512 59 85 2,347
Operating income (loss) 496 323 312 123 (73) 1,181
Depreciation expense 581 6 21 8 67 683
Capital expenditures 3,160 3 32 13 57 3,265
Identifiable assets 16,846 28,080 10,867 10,526 3,746 70,065
-----------------------------------------------------------------------------------------------------------------------------
(a) AIGFP's interest revenue and interest expense are reported as net revenues.
(b) Includes other operations which are not required to be reported separately
and adjustments and eliminations.
(c) Commissions, transaction and other fees are the sum of the net gain or loss
of trading activities, the net change in unrealized gain or loss, the net
interest revenues from forward rate agreements and interest rate swaps, and
where applicable, management and incentive fees from asset management
activities.
(f) A substantial portion of AIG's operations is conducted in countries
other than the United States and Canada. The following table summarizes AIG's
operations by major geographic segment. Allocations have been made on the basis
of the location of operations and assets.
GEOGRAPHIC SEGMENTS -- 2000
--------------------------------------------------
OTHER
(IN MILLIONS) DOMESTIC(A) FAR EAST FOREIGN CONSOLIDATED
----------------------------------------------------------------------------------------------------------------
Revenues(b) $34,189 $15,311 $7,535 $ 57,035
Real estate and other fixed assets, net of accumulated
depreciation 2,104 1,264 758 4,126
Flight equipment primarily under operating leases, net of
accumulated depreciation 19,325 -- -- 19,325
----------------------------------------------------------------------------------------------------------------
GEOGRAPHIC SEGMENTS -- 1999
--------------------------------------------------
OTHER
(IN MILLIONS) DOMESTIC(A) FAR EAST FOREIGN CONSOLIDATED
----------------------------------------------------------------------------------------------------------------
Revenues(b) $31,204 $13,242 $6,889 $ 51,335
Real estate and other fixed assets, net of accumulated
depreciation 1,747 1,006 755 3,508
Flight equipment primarily under operating leases, net of
accumulated depreciation 17,334 -- -- 17,334
----------------------------------------------------------------------------------------------------------------
GEOGRAPHIC SEGMENTS -- 1998
--------------------------------------------------
OTHER
(IN MILLIONS) DOMESTIC(A) FAR EAST FOREIGN CONSOLIDATED
----------------------------------------------------------------------------------------------------------------
Revenues(b) $28,677 $10,571 $6,719 $ 45,967
Real estate and other fixed assets, net of accumulated
depreciation 1,586 895 781 3,262
Flight equipment primarily under operating leases, net of
accumulated depreciation 16,330 -- -- 16,330
----------------------------------------------------------------------------------------------------------------
(a) Including general insurance operations in Canada.
(b)Represents the sum of general net premiums earned, life premium income, net
investment income, financial services commissions, transaction and other
fees, asset management commissions and other fees, equity in income of
minority-owned insurance operations and realized capital gains (losses).
77
79
19. SUMMARY OF QUARTERLY FINANCIAL INFORMATION -- UNAUDITED
The following quarterly financial information for each of the three months ended
March 31, June 30, September 30 and December 31, 2000 and 1999 is unaudited.
However, in the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the results of operations for
such periods, have been made for a fair presentation of the results shown.
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
(IN MILLIONS, EXCEPT -------------------- -------------------- -------------------- --------------------
PER SHARE AMOUNTS) 2000 1999 2000 1999 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
Revenues $13,627 $12,445 $14,161 $12,908 $13,934 $12,314 $15,313 $13,668
Net income 1,631 1,486 1,501 1,570 1,705 1,561 1,802 1,569
-------------------------------------------------------------------------------------------------------------------------------
Net income per common
share:
Basic $ 0.63 $ 0.57 $ 0.57 $ 0.60 $ 0.66 $ 0.60 $ 0.69 $ 0.60
Diluted 0.62 0.56 0.57 0.59 0.65 0.59 0.68 0.60
Average shares outstanding:
Basic 2,608 2,613 2,600 2,612 2,606 2,609 2,610 2,609
Diluted 2,644 2,656 2,634 2,654 2,633 2,651 2,639 2,649
-------------------------------------------------------------------------------------------------------------------------------
78
80
--------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET American International Group, Inc. and
Subsidiaries
(IN MILLIONS)
--------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
2001 2000
--------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS:
Investments and cash:
Fixed maturities:
Bonds available for sale, at market value (amortized
cost: 2001 -- $176,343; 2000 -- $153,921) $178,388 $153,763
Bonds held to maturity, at amortized cost (market
value: 2000 -- $12,053) -- 11,533
Bonds trading securities, at market value (cost:
2001 -- $823; 2000 -- $838) 822 846
Equity securities:
Common stocks (cost: 2001 -- $6,932; 2000 -- $7,051) 6,397 6,805
Non-redeemable preferred stocks (cost: 2001 -- $1,476;
2000 -- $1,318) 1,377 1,207
Mortgage loans on real estate, net of allowance
(2001 -- $107; 2000 -- $104) 11,368 11,047
Policy Loans 5,301 5,465
Collateral and guaranteed loans, net of allowance
(2001 -- $40; 2000 -- $40) 2,079 2,084
Financial services and asset management assets:
Flight equipment primarily under operating leases, net
of accumulated depreciation (2001 -- $3,098;
2000 -- $2,723) 21,674 19,325
Securities available for sale, at market value (cost:
2001 -- $16,995; 2000 -- $14,636) 17,027 14,669
Trading securities, at market value 6,523 7,347
Spot commodities, at market value 316 363
Unrealized gain on interest rate and currency swaps,
options and forward transactions 10,746 10,235
Trading assets 7,503 7,045
Securities purchased under agreements to resell, at
contract value 17,700 14,991
Finance receivables, net of allowance (2001 -- $398;
2000 -- $383) 11,448 11,378
Other invested assets 18,130 13,486
Short-term investments, at cost (approximates market
value) 11,352 6,502
Cash 544 522
--------------------------------------------------------------------------------------
Total investments and cash 328,695 298,613
Investment income due and accrued 3,559 3,522
Premiums and insurance balances receivable, net of
allowance (2001 -- $189; 2000 -- $170) 12,898 11,832
Reinsurance assets 25,037 23,964
Deferred policy acquisition costs 17,045 16,647
Investments in partially-owned companies 510 336
Real estate and other fixed assets, net of accumulated
depreciation (2001 -- $2,373; 2000 -- $2,264) 4,131 4,126
Separate and variable accounts 52,663 54,562
Other assets 16,765 13,069
--------------------------------------------------------------------------------------
TOTAL ASSETS $461,303 $426,671
--------------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
79
81
--------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET (CONTINUED) American International
Group, Inc. and Subsidiaries
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
2001 2000
--------------------------------------------------------------------------------------
(unaudited)
LIABILITIES:
Reserve for losses and loss expenses $ 40,842 $ 40,613
Reserve for unearned premiums 12,904 12,510
Future policy benefits for life and accident and health
insurance contracts 53,396 51,532
Policyholders' contract deposits 106,082 99,327
Other policyholders' funds 6,436 5,885
Reserve for commissions, expenses and taxes 3,132 2,807
Insurance balances payable 4,026 2,794
Funds held by companies under reinsurance treaties 1,851 1,435
Income taxes payable:
Current (58) 189
Deferred 3,925 3,032
Financial services and asset management liabilities:
Borrowings under obligations of guaranteed investment
agreements 14,977 13,595
Securities sold under agreements to repurchase, at
contract value 10,736 11,308
Trading liabilities 4,839 4,352
Securities and spot commodities sold but not yet
purchased, at market value 6,574 7,701
Unrealized loss on interest rate and currency swaps,
options and forward transactions 7,948 8,581
Trust deposits and deposits due to banks and other
depositors 2,179 1,895
Commercial paper 9,135 9,421
Notes, bonds and loans payable 31,136 23,594
Commercial paper 5,040 3,626
Notes, bonds, loans and mortgages payable 4,184 4,087
Separate and variable accounts 52,663 54,562
Minority interest 1,541 1,465
Other liabilities 23,921 11,507
--------------------------------------------------------------------------------------
TOTAL LIABILITIES 407,409 375,818
--------------------------------------------------------------------------------------
PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY COMPANIES 3,259 3,414
--------------------------------------------------------------------------------------
CAPITAL FUNDS:
Common stock, $2.50 par value; 5,000,000,000 shares
authorized; shares issued 2001 -- 2,787,511,574; 2000 --
2,787,511,574 6,913 6,914
Additional paid-in capital 2,736 2,830
Retained earnings 45,355 42,598
Accumulated other comprehensive income (loss) (1,788) (2,440)
Treasury stock, at cost; 2001 -- 166,400,326;
2000 -- 164,905,649 shares of common stock (2,581) (2,463)
--------------------------------------------------------------------------------------
TOTAL CAPITAL FUNDS 50,635 47,439
--------------------------------------------------------------------------------------
TOTAL LIABILITIES AND CAPITAL FUNDS $461,303 $426,671
--------------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
80
82
--------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME American International Group,
Inc. and Subsidiaries
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------------------------------------------------------------
SIX MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ ----------------
2001 2000 2001 2000
------------------------------------------------------------------------------------------------------
(unaudited)
GENERAL INSURANCE OPERATIONS:
Net premiums written $ 9,920 $ 8,730 $5,055 $4,504
Change in unearned premium reserve (456) (221) (313) (102)
------------------------------------------------------------------------------------------------------
Net premiums earned 9,464 8,509 4,742 4,402
Net investment income 1,423 1,323 707 660
Realized capital gains (losses) (58) 9 (37) (3)
------------------------------------------------------------------------------------------------------
10,829 9,841 5,412 5,059
------------------------------------------------------------------------------------------------------
Losses and loss expenses incurred 7,091 6,394 3,519 3,306
Underwriting expenses 1,877 1,676 983 869
------------------------------------------------------------------------------------------------------
8,968 8,070 4,502 4,175
------------------------------------------------------------------------------------------------------
OPERATING INCOME 1,861 1,771 910 884
------------------------------------------------------------------------------------------------------
LIFE INSURANCE OPERATIONS:
Premium income 9,193 8,493 4,822 4,291
Net investment income 5,752 5,141 2,904 2,615
Realized capital losses (21) (58) (3) (29)
------------------------------------------------------------------------------------------------------
14,924 13,576 7,723 6,877
------------------------------------------------------------------------------------------------------
Death and other benefits 5,277 4,585 2,929 2,407
Increase in future policy benefits 4,209 4,151 1,936 1,973
Acquisition and insurance expenses 2,651 2,466 1,399 1,264
------------------------------------------------------------------------------------------------------
12,137 11,202 6,264 5,644
------------------------------------------------------------------------------------------------------
OPERATING INCOME 2,787 2,374 1,459 1,233
------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES OPERATING INCOME 921 774 489 401
ASSET MANAGEMENT OPERATING INCOME 569 550 282 277
OTHER REALIZED CAPITAL LOSSES (356) (115) (309) (60)
OTHER INCOME (DEDUCTIONS) -- NET (1,032) (625) (875) (475)
------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 4,750 4,729 1,956 2,260
------------------------------------------------------------------------------------------------------
INCOME TAXES
Current 766 840 297 431
Deferred 605 559 247 223
------------------------------------------------------------------------------------------------------
1,371 1,399 544 654
------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 3,379 3,330 1,412 1,606
------------------------------------------------------------------------------------------------------
MINORITY INTEREST (209) (198) (97) (105)
------------------------------------------------------------------------------------------------------
NET INCOME $ 3,170 $ 3,132 $1,315 $1,501
------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE:
Basic $ 1.21 $ 1.20 $ 0.50 $ 0.57
------------------------------------------------------------------------------------------------------
Diluted $ 1.20 $ 1.19 $ 0.50 $ 0.57
------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PER COMMON SHARE $ 0.074 $ 0.067 $0.037 $0.033
------------------------------------------------------------------------------------------------------
AVERAGE SHARES OUTSTANDING:
Basic 2,622 2,604 2,621 2,600
Diluted 2,651 2,638 2,651 2,634
------------------------------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
81
83
--------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS American International Group,
Inc. and Subsidiaries
(IN MILLIONS)
--------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2001 2000
--------------------------------------------------------------------------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,170 $ 3,132
------- -------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Non-cash revenues, expenses, gains and losses included
in income:
Change in:
General and life insurance reserves 3,219 3,639
Premiums and insurance balances receivable and
payable -- net 199 (759)
Reinsurance assets (997) (324)
Deferred policy acquisition costs (619) (625)
Investment income due and accrued (3) (106)
Funds held under reinsurance treaties 416 14
Other policyholders' funds 13 273
Current and deferred income taxes -- net 557 381
Reserve for commissions, expenses and taxes 325 (33)
Other assets and liabilities -- net 436 (894)
Trading assets and liabilities -- net 29 (1,898)
Trading securities, at market value 824 521
Spot commodities, at market value 47 153
Net unrealized gain on interest rate and currency
swaps, options and forward transactions (1,144) (1,159)
Securities purchased under agreements to resell (2,709) 1,123
Securities sold under agreements to repurchase (572) (482)
Securities and spot commodities sold but not yet
purchased, at market value (1,127) 1,023
Realized capital losses 435 164
Equity in income of partially-owned companies and other
invested assets (291) (45)
Depreciation expenses, principally flight equipment 631 557
Change in cumulative translation adjustments (311) 4
Provision for finance receivable losses 128 97
Other -- net (547) 156
--------------------------------------------------------------------------------
Total adjustments (1,061) 1,780
--------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,109 $ 4,912
--------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
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--------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) American
International Group, Inc. and Subsidiaries
(IN MILLIONS)
------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2001 2000
------------------------------------------------------------------------------------
(unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of fixed maturities, at amortized cost matured or
redeemed $ -- $ 581
Cost of bonds, at market sold 32,008 19,663
Cost of bonds, at market matured or redeemed 3,282 3,748
Cost of equity securities sold 2,897 2,811
Realized capital losses (435) (164)
Purchases of fixed maturities (45,966) (30,182)
Purchases of equity securities (2,905) (3,093)
Mortgage, policy and collateral loans granted (1,559) (1,103)
Repayments of mortgage, policy and collateral loans 1,572 904
Sales of securities available for sale 1,825 2,894
Maturities of securities available for sale 1,002 1,102
Purchases of securities available for sale (5,180) (4,273)
Sales of flight equipment 68 79
Purchases of flight equipment (2,804) (2,146)
Net additions to real estate and other fixed assets (271) (240)
Sales or distributions of other invested assets 3,061 2,279
Investments in other invested assets (3,229) (2,676)
Change in short-term investments (4,827) (1,411)
Investments in partially-owned companies (110) --
Finance receivable originations and purchases (3,160) (3,404)
Finance receivable principal payments received 2,946 2,655
Other, net (107) (58)
------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (21,892) (12,034)
------------------------------------------------------------------------------------
Cash flows from financing activities:
Change in policyholders' contract deposits 6,142 2,518
Change in trust deposits and deposits due to banks and
other depositors 284 (190)
Change in commercial paper 5,254 3,646
Proceeds from notes, bonds, loans and mortgages payable 12,821 6,368
Repayments on notes, bonds, loans and mortgages payable (5,191) (5,296)
Proceeds from guaranteed investment agreements 9,201 3,772
Maturities of guaranteed investment agreements (7,819) (2,871)
Redemption of subsidiary company preferred stock (185) --
Proceeds from common stock issued 49 85
Proceeds from subsidiary company preferred stock issued -- 645
Cash dividends to shareholders (413) (373)
Acquisition of treasury stock (286) (1,139)
Other -- net (52) 119
------------------------------------------------------------------------------------
Net cash provided by financing activities 19,805 7,284
------------------------------------------------------------------------------------
Change in cash 22 162
Cash at beginning of period 522 426
------------------------------------------------------------------------------------
Cash at end of period $ 544 $ 588
------------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
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--------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME American
International Group, Inc. and Subsidiaries
(IN MILLIONS)
---------------------------------------------------------------------------------------------------
SIX MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- -----------------
2001 2000 2001 2000
---------------------------------------------------------------------------------------------------
(unaudited)
Net income $3,170 $3,132 $1,315 $ 1,501
Other comprehensive income:
Unrealized appreciation (depreciation) of
investments -- net of reclassification adjustments 788 (856) (988) (1,020)
Deferred income tax (expense) benefit on changes (231) 297 317 372
Foreign currency translation adjustments(a) (313) 4 (215) (45)
Applicable income tax benefit on changes 68 24 46 5
Cumulative effect of an accounting change, net of tax(b) 150 -- -- --
Net derivative gains (losses) arising from cash flow
hedging activities (135) -- 45 --
Deferred income tax expense on changes (14) -- (22) --
Cumulative effect of an accounting change, net of tax(c) 339 -- -- --
---------------------------------------------------------------------------------------------------
Total 652 (531) (817) (688)
---------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $3,822 $2,601 $ 498 $ 813
---------------------------------------------------------------------------------------------------
(a)Includes immaterial derivative gains and losses arising from hedges of net
investments in foreign operations.
(b)Consists of derivative gains and losses arising from the adoption of FASB
133.
(c)Represents the unrealized appreciation arising from the transfer of the bonds
held to maturity portfolio to the bonds available for sale portfolio in
connection with the implementation of FASB 133.
See Accompanying Notes to Financial Statements.
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NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
JUNE 30, 2001 (UNAUDITED)
American International Group, Inc. and Subsidiaries
(a) On August 29, 2001 (the acquisition date), American General Corporation
(AGC) was acquired by AIG. In connection with the acquisition, AIG issued
approximately 290 million shares of its common stock in an exchange for all the
outstanding common stock of AGC based on an exchange ratio of 0.5790 of a share
of AIG common stock for each share of American General Corporation's common
stock. The acquisition was accounted for as a pooling of interests and the
accompanying supplemental financial statements have been prepared to
retroactively combine AGC's financial statements for its six months ended June
30, 2001 with AIG's June 30, 2001 financial statements. These statements do not
extend through the acquisition date. However, these statements will become AIG's
historical consolidated financial statements after AIG issues its financial
statements that include the acquisition date.
All of the share information included herein reflects the application of
the exchange ratio to the number of shares of AGC common stock outstanding at
the relevant times rather than the number of shares of AIG common stock actually
issued and outstanding at such times.
The following is a reconciliation of the individual companies combined
results for the six months ended 2001 and 2000:
(IN MILLIONS) AIG AGC TOTAL
--------------------------------------------------------------
JUNE 30, JUNE 30,
2001
Revenues $24,729 $5,523 $30,252
Net income 3,159 11 3,170
2000
Revenues 22,316 5,472 27,788
Net income 2,753 379 3,132
--------------------------------------------------------------
(b) These statements are unaudited. In the opinion of management, all
adjustments consisting of normal recurring accruals have been made for a fair
presentation of the results shown. All material intercompany accounts and
transactions have been eliminated. For further information, refer to the Annual
Report on Form 10-K of AIG for the year ended December 31, 2000 (as amended by
this Current Report on Form 8-K).
(c) Earnings per share of AIG are based on the weighted average number of
common shares outstanding during the period, retroactively adjusted to reflect
all stock splits.
Cash dividends per common share reflect the adjustment for a common stock
split in the form of a 50 percent common stock dividend paid July 28, 2000. The
quarterly dividend rate per common share, commencing with the dividend paid
September 14, 2001 is $0.042.
(d) Cash flow information for the six month periods ended June 30, 2001 and
2000 is as follows:
(IN MILLIONS) 2001 2000
------------------------------------------------------------
Income taxes paid $ 941 $ 926
Interest paid $2,006 $1,628
------------------------------------------------------------
(e) Segment Information:
The following table summarizes the operations by major operating segment
for the first six months and second quarter of 2001 and 2000 (in millions):
--------------------------------------------------------------------------------
OPERATING SEGMENTS
----------------------------------------
SIX MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ ------------------
2001 2000 2001 2000
------------------------------------------------------------------------------------------------------
Revenues(1):
General Insurance $10,829 $ 9,841 $ 5,412 $ 5,059
Life Insurance 14,924 13,576 7,723 6,877
Financial Services 3,095 2,802 1,580 1,444
Asset Management 1,760 1,705 890 852
Other (356) (136) (309) (71)
------------------------------------------------------------------------------------------------------
Total $30,252 $27,788 $15,296 $14,161
------------------------------------------------------------------------------------------------------
Operating income:
General Insurance $ 1,861 $ 1,771 $ 910 $ 884
Life Insurance 2,787 2,374 1,459 1,233
Financial Services 921 774 489 401
Asset Management 569 550 282 277
Other (1,388)(2) (740) (1,184)(2) (535)
------------------------------------------------------------------------------------------------------
Total $ 4,750 $ 4,729 $ 1,956 $ 2,260
------------------------------------------------------------------------------------------------------
(1) Represents the sum of general net premiums earned, life premium income, net
investment income, financial services commissions, transaction and other
fees, asset management commissions and other fees, and realized capital
gains (losses).
(2) Including pre-tax charge of $654 million for termination fee ($600 million)
and other related costs in connection with AGC's termination of its merger
agreement with Prudential plc.
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The following table summarizes AIG's general insurance operations by major
reporting group for the first six months and second quarter of 2001 and 2000 (in
millions):
GENERAL INSURANCE
-------------------------------------
SIX MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- ----------------
2001 2000 2001 2000
---------------------------------------------------------------------------------------------------
Revenues:
Domestic Brokerage Group $ 6,127 $5,195 $3,081 $2,694
Foreign General 3,058 3,161 1,498 1,610
Other 1,644 1,485 833 755
---------------------------------------------------------------------------------------------------
Total $10,829 $9,841 $5,412 $5,059
---------------------------------------------------------------------------------------------------
Operating income before realized capital gains (losses)(1):
Domestic Brokerage Group $ 1,084 $ 974 $ 531 $ 515
Foreign General 591 502 292 241
Other 244 286 124 131
---------------------------------------------------------------------------------------------------
Total $ 1,919 $1,762 $ 947 $ 887
---------------------------------------------------------------------------------------------------
(1) Realized capital gains (losses) are not deemed to be an integral part of
AIG's general insurance operations' internal reporting groups.
The following table summarizes AIG's life insurance operations by major
reporting group for the first six months and second quarter of 2001 and 2000 (in
millions):
LIFE INSURANCE
--------------------------------------
SIX MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ ----------------
2001 2000 2001 2000
----------------------------------------------------------------------------------------------------
Revenues:
American International Assurance Company Ltd. and Nan Shan
Life Insurance Company, Ltd. $ 5,085 $ 4,676 $2,622 $2,408
American Life Insurance Company 2,784 2,750 1,382 1,378
Domestic Life 6,580 5,922 3,375 2,977
Other 475 228 344 114
----------------------------------------------------------------------------------------------------
Total $14,924 $13,576 $7,723 $6,877
----------------------------------------------------------------------------------------------------
Operating income before realized capital gains (losses)(1):
American International Assurance Company Ltd. and Nan Shan
Life Insurance Company, Ltd. $ 779 $ 673 $ 416 $ 360
American Life Insurance Company 438 372 228 190
Domestic Life 1,512 1,350 759 693
Other 79 37 59 19
----------------------------------------------------------------------------------------------------
Total $ 2,808 $ 2,432 $1,462 $1,262
----------------------------------------------------------------------------------------------------
(1) Realized capital gains (losses) are not deemed to be an integral part of
AIG's life insurance operations' internal reporting groups.
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The following table summarizes AIG's financial services operations by major
reporting group for the first six months and second quarter of 2001 and 2000 (in
millions):
FINANCIAL SERVICES
------------------------------------
SIX MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- ----------------
2001 2000 2001 2000
--------------------------------------------------------------------------------------------------
Revenues:
International Lease Finance Corporation $1,278 $1,157 $ 657 $ 607
AIG Financial Products Corp. 519 451 271 239
American General Finance, Inc. 995 932 505 469
AIG Trading Group Inc. 59 135 20 62
Other 244 127 127 67
--------------------------------------------------------------------------------------------------
Total $3,095 $2,802 $1,580 $1,444
--------------------------------------------------------------------------------------------------
Operating income:
International Lease Finance Corporation $ 344 $ 310 $ 184 $ 171
AIG Financial Products Corp. 354 278 189 139
American General Finance, Inc. 220 189 117 97
AIG Trading Group Inc. 14 35 7 13
Other (11) (38) (8) (19)
--------------------------------------------------------------------------------------------------
Total $ 921 $ 774 $ 489 $ 401
--------------------------------------------------------------------------------------------------
(f) Computation of Earnings Per Share
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
---------------------------------------------------------------------------------------------------
Six Months Three Months
Ended June 30, Ended June 30,
--------------- ---------------
2001 2000 2001 2000
---------------------------------------------------------------------------------------------------
Share information reflects an adjustment for a common stock
split in the form of a 50 percent common stock dividend
paid July 28, 2000.
Numerator:
Net income (applicable to common stock) -- basic $3,170 $3,132 $1,315 $1,501
Dividends on preferred securities -- 5 -- 2
---------------------------------------------------------------------------------------------------
Net income (applicable to common stock) -- diluted $3,170 $3,137 $1,315 $1,503
---------------------------------------------------------------------------------------------------
Denominator:
Basic:
Average outstanding shares used in the computation of per
share earnings:
Common stock 2,789 2,803 2,789 2,804
Common stock in treasury (167) (199) (168) (204)
---------------------------------------------------------------------------------------------------
Average outstanding shares -- basic 2,622 2,604 2,621 2,600
---------------------------------------------------------------------------------------------------
Diluted:
Average outstanding shares used in the computation of per
share earnings:
Common stock 2,789 2,803 2,789 2,804
Common stock in treasury (167) (199) (168) (204)
Stock options and stock purchase plan (treasury stock
method) 29 27 30 27
Convertible preferred securities -- 7 -- 7
---------------------------------------------------------------------------------------------------
Average outstanding shares -- diluted 2,651 2,638 2,651 2,634
---------------------------------------------------------------------------------------------------
Net income per share:
Basic $ 1.21 $ 1.20 $ 0.50 $ 0.57
---------------------------------------------------------------------------------------------------
Diluted $ 1.20 $ 1.19 $ 0.50 $ 0.57
---------------------------------------------------------------------------------------------------
(g) Statement of Accounting Standards No. 130 "Comprehensive Income" (FASB
130) establishes standards for reporting comprehensive income and its components
as part of capital funds. The reclassification adjustments with respect to
available for sale securities were $(435) million and $(164) million for the
first six months and $(349) million and $(92) million for the second quarter of
2001 and 2000, respectively.
(h) Accounting Standards:
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities". In June 2000, FASB issued Statement of
Financial Accounting Standards No. 138 "Accounting for Derivative Instruments
and Hedging Activities -- an amendment of FASB Statement No. 133" (collectively,
FASB 133).
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--------------------------------------------------------------------------------
FASB 133 requires AIG to recognize all derivatives in the consolidated
balance sheet at fair value. The financial statement recognition of the change
in the fair value of a derivative depends on a number of factors, including the
intended use of the derivative and the extent to which the derivative is
effective as part of a hedge transaction. The changes in fair value of the
derivative transactions of AIGFP and AIGTG are presented as a component of AIG's
operating income. The discussion below relates to the derivative activities of
AIG other than those of AIGFP and AIGTG.
On the date the derivative contract is entered into, AIG designates the
derivative as: (1) a hedge of the subsequent changes in the fair value of a
recognized asset or liability or of an unrecognized firm commitment ("fair
value" hedge); (2) a hedge of a forecasted transaction, or the variability of
cash flows to be received or paid related to a recognized asset or liability
("cash flow" hedge); or (3) a hedge of a net investment in a foreign operation.
Fair value and cash flow hedges may involve foreign currencies ("foreign
currency hedges"). The gain or loss in the fair value of a derivative that is
designated, qualifies and is highly effective as a fair value hedge is recorded
in current period earnings along with the loss or gain on the hedged item
attributable to the hedged risk. The gain or loss in the fair value of a
derivative that is designated, qualifies and is highly effective as a cash flow
hedge is recorded in other comprehensive income, until earnings are affected by
the variability of cash flows. The gain or loss in the fair value of a
derivative that is designated, qualifies and is highly effective as a hedge of a
net investment in a foreign operation is recorded in the foreign currency
translation adjustments account within other comprehensive income. Changes in
the fair value of derivatives used for other than the above hedging activities
are reported in current period earnings.
AIG documents all relationships between hedging instruments and hedged
items, as well as its risk-management objectives and strategy for undertaking
various hedge transactions. This process includes linking all derivatives that
are designated as hedges to specific assets or liabilities on the balance sheet,
or specific firm commitments or forecasted transactions. AIG also assesses, both
at the hedge's inception and on an ongoing basis, whether the derivatives used
in hedging transactions are highly effective in offsetting changes in fair
values or cash flows of hedged items.
AIG adopted FASB 133 on January 1, 2001. In accordance with the transition
provisions of FASB 133, AIG recorded in its consolidated income statement for
the first six months of 2001 a cumulative effect of an accounting change
adjustment loss of $6 million and is presented as a component of other income
(deductions) -- net. This loss represents the net fair value of all previously
unrecorded derivative instruments as of January 1, 2001, net of tax and after
the application of hedge accounting. AIG also recorded in its consolidated
statement of comprehensive income for the first six months of 2001 a cumulative
effect of an accounting change adjustment gain of $150 million. This gain
represents the increase in other comprehensive income, net of taxes, arising
from recognizing the fair value of all derivative contracts designated as cash
flow hedging instruments, and to a lesser extent, hedging instruments used to
hedge net investments in foreign operations.
AIG (excluding its two trading operations, AIGFP and AIGTG) uses derivative
instruments (principally swap and forward contracts) to hedge risk exposures to
interest rate and foreign currency risks. These risks arise primarily from
available-for-sale fixed income securities, debt, policyholder account balance
liabilities associated with guaranteed investment contracts and net investments
in foreign operations. Other hedging activities, such as those involving
forecasted transactions or equity securities, are not significant. During the
first six months of 2001, there were no hedges that were discontinued or
otherwise no longer qualify as hedges under FASB 133. With respect to fair value
hedges, net income for the first six months reflected a net $3 million loss from
hedge ineffectiveness. With respect to cash flow hedges, such ineffectiveness
amounted to a net loss of less than $1 million. During the first six months of
2001, there were minor reclassifications to earnings from other comprehensive
income under cash flow hedge accounting. These reclassifications were connected
to programs of synthetically converting certain investment securities, debt
issuances or policyholder account balance liabilities associated with guaranteed
investment contracts, from a floating interest rate to a fixed interest rate. As
at June 30, 2001, the maximum amount of net derivative losses to be reclassified
into net income within the next twelve months is insignificant. The maximum
length of time over which future cash flows are hedged is approximately 9 years.
In addition to hedging activities, AIG also uses derivative instruments
with respect to investment operations, which include, among other things,
writing option contracts, and purchasing investments with embedded derivatives,
such as equity linked notes and convertible bonds. All changes in the market
value of these derivatives are recorded in earnings. AIG bifurcates an embedded
derivative where: (1) the economic characteristics of the embedded instruments
are not clearly and closely related to those of the remaining components of the
financial instrument; and (2) a separate instrument with the same terms as the
embedded instrument meets the definition of a derivative under FASB 133.
In accordance with the transition provisions of FASB 133, AIG transferred
bonds in the held to maturity, at amortized cost category into the bonds
available for sale, at market value category. The amortized cost of the bonds
transferred was $11.53 billion. The unrealized appreciation, net of deferred tax
expense was approximately $339 million at the date of transfer and was recorded
as a cumulative effect of an accounting change within other comprehensive
income. Under the provisions of FASB 133, such a transfer does not affect AIG's
intent nor its ability to hold current or future bonds to their maturity.
(i) On July 31, 2001 AGC redeemed all preferred securities with respect to
AGC's 8.45% Cumulative Monthly Income Preferred Securities and AGC's 8 1/8%
Cumulative Monthly Income
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--------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
Preferred Securities. These preferred securities had a total carrying value of
$502 million. The redemption price of each class of preferred security was $25
per share, its liquidation value.
(j) Subsequent Events
AIG continues to update the estimates of its total expected net losses
resulting from the terrorist attacks of September 11, 2001. It is impossible for
any company to precisely estimate its total losses at the current time. Although
AIG's property insurance coverages on the World Trade Center complex are minor,
AIG expects ultimately to receive claims from many insureds across a wide range
of coverages. Based on the information available at the current time, AIG's net
pre-tax losses are expected to approximate $800 million.
On August 29, 2001, AIG acquired AGC in a transaction accounted for as a
pooling of interests. As a result, all financial information presented herein
for the combined entity reflects the results of AGC as if AGC had been
consolidated for all periods presented. It is estimated that the combined entity
will incur one-time pre-tax costs of approximately $1.3 billion in the third
quarter of 2001 ($950 million after tax) with additional less significant costs
expected to be incurred in the fourth quarter of 2001 and in 2002 and 2003
related to the ongoing integration of operations.
Approximately 40 percent of the one-time costs incurred in the third
quarter are related to direct costs with respect to the acquisition such as
investment banking, legal and accounting fees, employee severance and other
termination benefits, and other compensation costs related to change in control
provisions applicable to AGC executives. Also included in one-time costs are
charges resulting from post-business combination plans. Such charges recognize
that certain assets will have no future economic benefit or ability to generate
future revenues. Such costs include asset impairment charges related to
software, leasehold improvements and certain goodwill related to such operations
as part of the post-business combination plans. Also included are certain
adjustments associated with conforming AGC's balances to AIG's existing
accounting policies and methodologies.
Ongoing costs with respect to the integration of operations will be
expensed in future periods as incurred. AIG expects that these ongoing costs
will include costs for the integration of computer systems, the training and
relocation of certain employees and the consolidation of facilities.
As previously stated, AIG ultimately anticipates annual savings of
approximately $400 million from the business combination, reflecting principally
the benefits of reductions in redundant operations.
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--------------------------------------------------------------------------------
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
American International Group, Inc. and Subsidiaries
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q and other publicly available documents may
include, and AIG's officers and representatives may from time to time make,
statements which may constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements are
not historical facts but instead represent only AIG's belief regarding future
events, many of which, by their nature, are inherently uncertain and outside of
AIG's control. These statements may address, among other things, AIG's strategy
for growth, product development, regulatory approvals, market position,
financial results and reserves. It is possible that AIG's actual results and
financial condition may differ, possibly materially, from the anticipated
results and financial condition indicated in these forward-looking statements.
Important factors that could cause AIG's actual results to differ, possibly
materially, from those in the specific forward-looking statements are discussed
throughout this Management's Discussion and Analysis of Financial Condition and
Results of Operations. AIG is not under any obligation to (and expressly
disclaims any such obligations to) update or alter any forward-looking
statement, whether written or oral, that may be made from time to time, whether
as a result of new information, future events or otherwise.
OPERATIONAL REVIEW
GENERAL INSURANCE OPERATIONS
AIG's general insurance subsidiaries are multiple line companies writing
substantially all lines of property and casualty insurance.
Domestic general insurance operations are comprised of the Domestic
Brokerage Group (DBG), which includes The Hartford Steam Boiler Inspection and
Insurance Company (HSB) and the domestic operations of Transatlantic Holdings,
Inc. (Transatlantic), Personal Lines, including 21st Century Insurance Group
(21st Century), and Mortgage Guaranty.
HSB was acquired on November 22, 2000, and was initially consolidated into
AIG's financial statements during the fourth quarter of 2000.
DBG is AIG's primary domestic division. DBG writes substantially all
classes of business insurance, accepting such business mainly from insurance
brokers. This provides DBG the opportunity to select specialized markets and
retain underwriting control. Any licensed broker is able to submit business to
DBG without the traditional agent-company contractual relationship, but such
broker usually has no authority to commit DBG to accept a risk.
Personal Lines engages in the mass marketing of personal lines insurance,
primarily private passenger auto and homeowners and personal umbrella coverages.
Mortgage Guaranty provides guaranty insurance on conventional first
mortgage loans on single family dwellings and condominiums.
AIG's Foreign General insurance group accepts risks primarily underwritten
through American International Underwriters (AIU), a marketing unit consisting
of wholly owned agencies and insurance entities. The Foreign General insurance
group also includes business written by AIG's foreign-based insurance
subsidiaries for their own accounts. The Foreign General insurance group uses
various marketing methods to write both business and personal lines insurance
with certain refinements for local laws, customs and needs. AIU operates in over
70 countries in Asia, the Pacific Rim, Europe, Africa, Middle East and Latin
America. Transatlantic's foreign operations are included in this group. (See
also Note (d) of Notes to Financial Statements.)
General insurance operations for the six month periods ending June 30, 2001
and 2000 were as follows:
(IN MILLIONS)
------------------------------------------------------------
2001 2000
------------------------------------------------------------
Net premiums written*:
Domestic $6,953 $5,741
Foreign 2,967 2,989
------------------------------------------------------------
Total $9,920 $8,730
------------------------------------------------------------
Net premiums earned*:
Domestic $6,694 $5,636
Foreign 2,770 2,873
------------------------------------------------------------
Total $9,464 $8,509
------------------------------------------------------------
Adjusted underwriting profit*:
Domestic $ 219 $ 229
Foreign 277 210
------------------------------------------------------------
Total $ 496 $ 439
------------------------------------------------------------
Net investment income:
Domestic $1,109 $1,031
Foreign 314 292
------------------------------------------------------------
Total $1,423 $1,323
------------------------------------------------------------
Operating income before realized capital
gains (losses)*:
Domestic $1,328 $1,260
Foreign 591 502
------------------------------------------------------------
Total 1,919 1,762
Realized capital gains (losses) (58) 9
------------------------------------------------------------
Operating income $1,861 $1,771
------------------------------------------------------------
* Reflects the realignment of certain internal divisions in 2000.
During the first six months of 2001, net premiums written and net premiums
earned increased 13.6 percent and 11.2 percent, respectively, from those of
2000. During the first six months of 2001, AIG cancelled or non-renewed
approximately $225 million of business worldwide that did not meet AIG's
underwriting standards.
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American International Group, Inc. and Subsidiaries
General insurance domestic net premiums written and net premiums earned for
the six month periods ended June 30, 2001 and 2000 were as follows:
(IN MILLIONS)
------------------------------------------------------------
2001 2000
------------------------------------------------------------
Net premiums written:
DBG* $5,468 $4,290
Personal Lines 1,246 1,233
Mortgage Guaranty 239 218
------------------------------------------------------------
Total* $6,953 $5,741
------------------------------------------------------------
Net premiums earned:
DBG* $5,181 $4,269
Personal Lines 1,273 1,147
Mortgage Guaranty 240 220
------------------------------------------------------------
Total* $6,694 $5,636
------------------------------------------------------------
* Reflects the realignment of certain internal divisions in 2000.
Commencing in the latter part of 1999 and continuing through 2001, the
commercial property-casualty market place has experienced rate increases.
Virtually all areas of DBG have experienced rate increases. Overall, DBG's net
premiums written increased $1.18 billion or 27.5 percent in the first six months
of 2001 over 2000.
Personal Lines' net premiums written increased 1.1 percent or $13 million
in the first six months of 2001 over 2000. The growth in 2001 primarily resulted
from an increase in the number of policies issued with respect to preferred,
standard and non-standard auto risks and increased rates.
Foreign general insurance net premiums written and net premiums earned
declined 0.7 percent and 3.6 percent, respectively, in the first six months of
2001 when compared to the same period of 2000. Foreign general insurance
operations produced 29.9 percent of the general insurance net premiums written
in the first six months of 2001 and 34.2 percent in 2000.
In comparing the foreign currency exchange rates used to translate the
results of AIG's foreign general operations during the first six months of 2001
to those foreign currency exchange rates used to translate AIG's foreign general
results during the same period of 2000, the U.S. dollar strengthened in value in
relation to most major foreign currencies in which AIG transacts business.
Accordingly, when foreign net premiums written were translated into U.S. dollars
for the purposes of the preparation of the consolidated financial statements,
total general insurance net premiums written were approximately 3.0 percentage
points less than they would have been if translated utilizing those foreign
currency exchange rates which prevailed during that same period of 2000.
Because of the nature and diversity of AIG's operations and the continuing
rapid changes in the insurance industry worldwide, together with the factors
discussed above, it is difficult to assess further or project future growth in
AIG's net premiums written and reserve for losses and loss expenses.
Net premiums written are initially deferred and earned based upon the terms
of the underlying policies. The net unearned premium reserve constitutes
deferred revenues which are generally earned ratably over the policy period.
Thus, the net unearned premium reserve is not fully recognized as net premiums
earned until the end of the policy period.
AIG, along with most general insurance entities, uses the loss ratio, the
expense ratio and the combined ratio as measures of performance. The loss ratio
is the sum of losses and loss expenses incurred divided by net premiums earned.
The expense ratio is statutory underwriting expenses divided by net premiums
written. The combined ratio is the sum of the loss ratio and the expense ratio.
These ratios are relative measurements that describe for every $100 of net
premiums earned or written, the cost of losses and statutory expenses,
respectively. The combined ratio presents the total cost per $100 of premium
production. A combined ratio below 100 demonstrates underwriting profit; a
combined ratio above 100 demonstrates underwriting loss. The statutory general
insurance ratios were as follows:
------------------------------------------------------------
2001 2000
------------------------------------------------------------
Domestic:
Loss Ratio 80.64 80.84
Expense Ratio 16.49 16.41
------------------------------------------------------------
Combined Ratio 97.13 97.25
------------------------------------------------------------
Foreign:
Loss Ratio 61.12 63.96
Expense Ratio 30.86 28.95
------------------------------------------------------------
Combined Ratio 91.98 92.91
------------------------------------------------------------
Consolidated:
Loss Ratio 74.92 75.14
Expense Ratio 20.79 20.71
------------------------------------------------------------
Combined Ratio 95.71 95.85
------------------------------------------------------------
AIG believes that underwriting profit is the true measure of the
performance of the core business of a general insurance company.
Underwriting profit is measured in two ways: statutory underwriting profit
and Generally Accepted Accounting Principles (GAAP) underwriting profit.
Statutory underwriting profit is arrived at by reducing net premiums earned
by net losses and loss expenses incurred and net expenses incurred. Statutory
accounting differs from GAAP, as statutory accounting requires immediate expense
recognition and ignores the matching of revenues and expenses as required by
GAAP. That is, for statutory purposes, all expenses, most specifically
acquisition expenses, are recognized immediately, not consistent with the
revenues earned.
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A basic premise of GAAP accounting is the recognition of expenses at the
same time revenues are earned, the principle of matching. Therefore, to convert
underwriting results to a GAAP basis, acquisition expenses are deferred and
recognized together with the related revenues. Accordingly, the statutory
underwriting profit has been adjusted as a result of acquisition expenses being
deferred as required by GAAP. Thus, "adjusted underwriting profit" is a GAAP
measurement which can be viewed as gross margin or an intermediate subtotal in
calculating operating income and net income.
A major part of the discipline of a successful general insurance company is
to produce an underwriting profit, exclusive of investment income. If
underwriting is not profitable, losses incurred are a major factor. The result
is that the premiums are inadequate to pay for losses and expenses and produce a
profit; therefore, investment income must be used to cover underwriting losses.
If assets and the income therefrom are insufficient to pay claims and expenses
over extended periods, an insurance company cannot survive. For these reasons,
AIG views and manages its underwriting operations separately from its investment
operations.
The adjusted underwriting profits were $496 million in the first six months
of 2001 and $439 million in the same period of 2000. Domestic adjusted
underwriting profit increased primarily as a result of the disciplined
underwriting of DBG. The regulatory, product type and competitive environment as
well as the degree of litigation activity in any one country varies
significantly. These factors have a direct impact on pricing and consequently
profitability as reflected by adjusted underwriting profit and statutory general
insurance ratios.
AIG's results reflect the net impact of incurred losses from catastrophes
approximating $48 million and $44 million in the first six months of 2001 and
2000, respectively. AIG's gross incurred losses from catastrophes approximated
$101 million and $112 million in 2001 and 2000, respectively. The impact of
losses caused by catastrophes can fluctuate widely from period to period, making
comparisons of recurring type business more difficult. The pro forma table below
excludes catastrophe losses in order to present comparable results of AIG's
recurring core underwriting operations. The pro forma consolidated statutory
general insurance ratios would be as follows:
------------------------------------------------------------
2001 2000
------------------------------------------------------------
Loss Ratio 74.42 74.62
Expense Ratio 20.79 20.71
------------------------------------------------------------
Combined Ratio 95.21 95.33
------------------------------------------------------------
AIG's historic ability to maintain its combined ratio below 100 is
primarily attributable to the profitability of AIG's foreign general insurance
operations and AIG's emphasis on maintaining its disciplined underwriting,
especially in the domestic specialty markets. In addition, AIG does not seek net
premium growth where rates do not adequately reflect its assessment of
exposures.
General insurance net investment income in the first six months of 2001
increased 7.6 percent when compared to the same period of 2000. The growth in
net investment income in 2001 was primarily attributable to new cash flow for
investment. The new cash flow was generated from net general insurance operating
cash flow and included the compounding of previously earned and reinvested net
investment income. (See also the discussion under "Liquidity" herein.)
General insurance realized capital losses were $58 million in the first six
months of 2001 and realized capital gains were $9 million in 2000. These
realized capital gains and losses resulted from the ongoing management of the
general insurance investment portfolios within the overall objectives of the
general insurance operations and arose primarily from the disposition of equity
securities and available for sale fixed maturities as well as redemptions of
fixed maturities.
General insurance operating income in the first six months of 2001
increased 5.1 percent when compared to the same period of 2000. The contribution
of general insurance operating income to income before income taxes and minority
interest was 39.2 percent during the first six months of 2001 compared to 37.4
percent in the same period of 2000.
AIG is a major purchaser of reinsurance for its general insurance
operations. AIG is cognizant of the need to exercise good judgment in the
selection and approval of both domestic and foreign companies participating in
its reinsurance programs. AIG insures risks in over 70 countries and its
reinsurance programs must be coordinated in order to provide AIG the level of
reinsurance protection that AIG desires. These reinsurance arrangements do not
relieve AIG from its direct obligations to its insureds.
AIG's general reinsurance assets amounted to $23.88 billion and resulted
from AIG's reinsurance arrangements. Thus, a credit exposure existed at June 30,
2001 with respect to reinsurance recoverable to the extent that any reinsurer
may not be able to reimburse AIG under the terms of these reinsurance
arrangements. AIG manages its credit risk in its reinsurance relationships by
transacting with reinsurers that it considers financially sound, and when
necessary AIG holds substantial collateral in the form of funds, securities
and/or irrevocable letters of credit. This collateral can be drawn on for
amounts that remain unpaid beyond specified time periods on an individual
reinsurer basis. At December 31, 2000, approximately 43 percent of the general
reinsurance assets were from unauthorized reinsurers. In order to obtain
statutory recognition, nearly all of these balances were collateralized. The
remaining 57 percent of the general reinsurance assets were from authorized
reinsurers and over 95 percent of such balances are from reinsurers rated
A-(excellent) or better, as rated by A.M. Best. This rating is a measure of
financial strength. The terms authorized and unauthorized pertain to regulatory
categories, not creditworthiness. Through June 30, 2001, these distribution
percentages have not significantly changed.
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AIG's allowance for estimated unrecoverable reinsurance has not
significantly changed from December 31, 2000 when AIG had allowances for
unrecoverable reinsurance approximating $76 million. At that date AIG had no
significant reinsurance recoverables from any individual reinsurer which is
financially troubled (e.g., liquidated, insolvent, in receivership or otherwise
subject to formal or informal regulatory restriction).
AIG's Reinsurance Security Department conducts ongoing detailed assessments
of the reinsurance markets and current and potential reinsurers, both foreign
and domestic. Such assessments include, but are not limited to, identifying if a
reinsurer is appropriately licensed, and has sufficient financial capacity, and
the local economic environment in which a foreign reinsurer operates. This
department also reviews the nature of the risks ceded and the need for
collateral. In addition, AIG's Credit Risk Committee reviews the credit limits
for and concentrations with any one reinsurer.
AIG enters into certain intercompany reinsurance transactions for its
general and life operations. AIG enters these transactions as a sound and
prudent business practice in order to maintain underwriting control and spread
insurance risk among various legal entities. These reinsurance agreements have
been approved by the appropriate regulatory authorities. All material
intercompany transactions have been eliminated in consolidation.
At June 30, 2001, the consolidated general reinsurance assets of $23.88
billion include reinsurance recoverables for paid losses and loss expenses of
$3.69 billion and $15.78 billion with respect to the ceded reserve for losses
and loss expenses, including ceded losses incurred but not reported (IBNR)
(ceded reserves). The ceded reserves represent the accumulation of estimates of
ultimate ceded losses including provisions for ceded IBNR and loss expenses. The
methods used to determine such estimates and to establish the resulting ceded
reserves are continually reviewed and updated. Any adjustments therefrom are
reflected in income currently. It is AIG's belief that the ceded reserves at
June 30, 2001 were representative of the ultimate losses recoverable. In the
future, as the ceded reserves continue to develop to ultimate amounts, the
ultimate loss recoverable may be greater or less than the reserves currently
ceded.
At June 30, 2001, general insurance reserves for losses and loss expenses
(loss reserves) amounted to $40.84 billion. These loss reserves represent the
accumulation of estimates of ultimate losses, including IBNR, and loss expenses
and amounts of discounting related to certain workers' compensation claims. At
June 30, 2001, general insurance net loss reserves increased $112 million from
prior year end to $25.06 billion. The net loss reserves represent loss reserves
reduced by reinsurance recoverables, net of an allowance for unrecoverable
reinsurance. The methods used to determine such estimates and to establish the
resulting reserves are continually reviewed and updated. Any adjustments
resulting therefrom are reflected in operating income currently. It is
management's belief that the general insurance net loss reserves are adequate to
cover all general insurance net losses and loss expenses as at June 30, 2001. In
the future, if the general insurance net loss reserves develop deficiently, such
deficiency would have an adverse impact on future results of operations.
In a very broad sense, the general loss reserves can be categorized into
two distinct groups: one group being long tail casualty lines of business. Such
lines include excess and umbrella liability, directors and officers' liability,
professional liability, medical malpractice, general liability, products'
liability, and related classes. These lines account for approximately one-half
of net losses and loss expenses. The other group is short tail lines of business
consisting principally of property lines, certain classes of casualty lines and
includes personal lines.
Estimation of ultimate net losses and loss expenses (net losses) for long
tail casualty lines of business is a complex process and depends on a number of
factors, including the line and volume of the business involved. In the more
recent accident years of long tail casualty lines there is limited statistical
credibility in reported net losses. That is, a relatively low proportion of net
losses would be reported claims and expenses and an even smaller proportion
would be net losses paid. A relatively high proportion of net losses would
therefore be IBNR.
A variety of actuarial methods and assumptions are normally employed to
estimate net losses for long tail casualty lines. These methods ordinarily
involve the use of loss trend factors intended to reflect the estimated annual
growth in loss costs from one accident year to the next. For the majority of
long tail casualty lines, net loss trend factors approximated four percent. Loss
trend factors reflect many items including changes in claims handling, exposure
and policy forms and current and future estimates of monetary inflation and
social inflation. Thus, many factors are implicitly considered in estimating the
year to year growth in loss costs. Therefore, AIG's carried net long tail loss
reserves are judgmentally set as well as tested for reasonableness using the
most appropriate loss trend factors for each class of business. In the
evaluation of AIG's net loss reserves, loss trend factors vary slightly,
depending on the particular class and nature of the business involved. These
factors are periodically reviewed and subsequently adjusted, as appropriate, to
reflect emerging trends which are based upon past loss experience.
Estimation of net losses for short tail business is less complex than for
long tail casualty lines. Loss cost trends for many property lines can generally
be assumed to be similar to the growth in exposure of such lines. For example,
if the fire insurance coverage remained proportional to the actual value of the
property, the growth in the property's exposure to fire loss can be approximated
by the amount of insurance purchased.
For other property and short tail casualty lines, the loss trend is
implicitly assumed to grow at the rate that reported net losses grow from one
year to the next. The concerns noted above for longer tail casualty lines with
respect to the limited statistical credibility of reported net losses generally
do not apply to shorter tail lines.
AIG continues to receive claims asserting injuries from toxic waste,
hazardous substances, and other environmental pollutants
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and alleged damages to cover the cleanup costs of hazardous waste dump sites
(hereinafter referred to collectively as environmental claims) and indemnity
claims asserting injuries from asbestos. The vast majority of these asbestos and
environmental claims emanate from policies written in 1984 and prior years. AIG
has established a specialized claims unit which investigates and adjusts all
such asbestos and environmental claims. Commencing in 1985, standard policies
contained an absolute exclusion for pollution related damage. However, AIG
currently underwrites environmental impairment liability insurance on a claims
made basis and excluded such claims from the analyses included herein.
Estimation of asbestos and environmental claims loss reserves is a
difficult process. These asbestos and environmental claims cannot be estimated
by conventional reserving techniques as previously described. Quantitative
techniques frequently have to be supplemented by subjective considerations
including managerial judgment. Significant factors which affect the trends which
influence the development of asbestos and environmental claims are the
inconsistent court resolutions and judicial interpretations which broaden the
intent of the policies and scope of coverage. The current case law can be
characterized as still evolving and there is little likelihood that any firm
direction will develop in the near future. Additionally, the exposure for
cleanup costs of hazardous waste dump sites involves issues such as allocation
of responsibility among potentially responsible parties and the government's
refusal to release parties. The cleanup cost exposure may significantly change
if potential Congressional reauthorization of Superfund dramatically changes the
current program.
In the interim, AIG and other industry members have and will continue to
litigate the broadening judicial interpretation of the policy coverage and the
liability issues. At the current time, it is not possible to determine the
future development of asbestos and environmental claims with the same degree of
reliability as is the case for other types of claims. Such development will be
affected by the extent to which courts continue to expand the intent of the
policies and the scope of the coverage, as they have in the past, as well as by
the changes in Superfund and waste dump site coverage issues. Although the
estimated liabilities for these claims are subject to a significantly greater
margin of error than for other claims, the reserves carried for these claims at
June 30, 2001 are believed to be adequate as these reserves are based on the
known facts and current law. Furthermore, as AIG's net exposure retained
relative to the gross exposure written was lower in 1984 and prior years, the
potential impact of these claims is much smaller on the net loss reserves than
on the gross loss reserves. In the future, if the environmental claims develop
deficiently, such deficiency would have an adverse impact on future results of
operations. (See the previous discussion on reinsurance collectibility herein.)
The majority of AIG's exposures for asbestos and environmental claims are
excess casualty coverages, not primary coverages. Thus, the litigation costs are
treated in the same manner as indemnity reserves. That is, litigation expenses
are included within the limits of the liability AIG incurs. Individual
significant claim liabilities, where future litigation costs are reasonably
determinable, are established on a case basis.
A summary of reserve activity, including estimates for applicable IBNR,
relating to asbestos and environmental claims separately and combined at June
30, 2001 and 2000 was as follows:
(IN MILLIONS)
-----------------------------------------------------------------------------------------------
2001 2000
-------------- --------------
GROSS NET GROSS NET
-----------------------------------------------------------------------------------------------
ASBESTOS:
Reserve for losses and loss expenses at beginning of year $1,100 $338 $1,093 $306
Losses and loss expenses incurred 191 38 29 14
Losses and loss expenses paid (174) (60) (206) (51)
-----------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of period $1,117 $316 $ 916 $269
-----------------------------------------------------------------------------------------------
ENVIRONMENTAL:
Reserve for losses and loss expenses at beginning of year $1,345 $517 $1,519 $585
Losses and loss expenses incurred (30) (40) 3 2
Losses and loss expenses paid (128) (46) (47) (25)
-----------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of period $1,187 $431 $1,475 $562
-----------------------------------------------------------------------------------------------
COMBINED:
Reserve for losses and loss expenses at beginning of year $2,445 $855 $2,612 $891
Losses and loss expenses incurred 161 (2) 32 16
Losses and loss expenses paid (302) (106) (253) (76)
-----------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of period $2,304 $747 $2,391 $831
-----------------------------------------------------------------------------------------------
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The gross and net IBNR included in the aforementioned reserve for losses
and loss expenses at June 30, 2001 and December 31, 2000 were estimated as
follows:
(IN MILLIONS)
----------------------------------------------------------------------------------------------
2001 2000
-------------- --------------
GROSS NET GROSS NET
----------------------------------------------------------------------------------------------
Combined $1,040 $287 $1,042 $314
----------------------------------------------------------------------------------------------
A summary of asbestos and environmental claims count activity for the six
month periods ended June 30, 2001 and 2000 was as follows:
---------------------------------------------------------------------------------------------------------------------------
2001 2000
----------------------------------- -----------------------------------
ASBESTOS ENVIRONMENTAL COMBINED ASBESTOS ENVIRONMENTAL COMBINED
---------------------------------------------------------------------------------------------------------------------------
Claims at beginning of year 6,796 11,323 18,119 6,746 13,432 20,178
Claims during year:
Opened 481 1,087 1,568 395 909 1,304
Settled (77) (776) (853) (61) (348) (409)
Dismissed or otherwise resolved (426) (1,708) (2,134) (287) (1,766) (2,053)
---------------------------------------------------------------------------------------------------------------------------
Claims at end of period 6,774 9,926 16,700 6,793 12,227 19,020
---------------------------------------------------------------------------------------------------------------------------
The average cost per claim settled, dismissed or otherwise resolved for the
six month periods ended June 30, 2001 and 2000 was as follows:
-------------------------------------------------------------------
2001 2000
-------------------- --------------------
GROSS NET GROSS NET
-------------------------------------------------------------------
Asbestos $345,900 $119,300 $592,000 $146,600
Environmental 51,500 18,500 22,200 11,800
Combined 101,100 35,500 102,800 30,900
-------------------------------------------------------------------
A.M. Best, an insurance rating agency, has developed a survival ratio to
measure the number of years it would take a company to exhaust both its asbestos
and environmental reserves for losses and loss expenses based on that company's
current level of asbestos and environmental claims payments. This is a ratio
derived by taking the current ending losses and loss expense reserves and
dividing by the average annual payments for the prior three years. Therefore,
the ratio derived is a simplistic measure of an estimate of the number of years
it would be before the current ending losses and loss expense reserves would be
paid off using recent average payments. The higher the ratio, the more years the
reserves for losses and loss expenses cover these claims payments. These ratios
are computed based on the ending reserves for losses and loss expenses over the
respective claims settlements during the fiscal year. Such payments include
indemnity payments and legal and loss adjustment payments. It should be noted,
however, that this is an extremely simplistic approach to measuring asbestos and
environmental reserve levels. Many factors, such as aggressive settlement
procedures, mix of business and level of coverage provided, have significant
impact on the amount of asbestos and environmental losses and loss expense
reserves, ultimate payments thereof and the resultant ratio.
The developed survival ratios include both involuntary and voluntary
indemnity payments. Involuntary payments are primarily attributable to court
judgments, court orders, covered claims with no coverage defenses, state
mandated cleanup costs, claims where AIG's coverage defenses are minimal, and
settlements made less than six months before the first trial setting. Also, AIG
considers all legal and loss adjustment payments as involuntary.
AIG believes voluntary indemnity payments should be excluded from the
survival ratio. The special asbestos and environmental claims unit actively
manages AIG's asbestos and environmental claims and proactively pursues early
settlement of environmental claims for all known and unknown sites. As a result,
AIG reduces its exposure to future environmental loss contingencies.
AIG's survival ratios for involuntary asbestos and environmental claims,
separately and combined, were based upon a three year average payment. These
ratios at June 30, 2001 and 2000 were as follows:
------------------------------------------------------------
2001 2000
------------- -------------
GROSS NET GROSS NET
------------------------------------------------------------
Involuntary survival ratios:
Asbestos 3.2 3.4 2.8 3.9
Environmental 17.4 16.3 19.1 18.3
Combined 6.6 7.5 6.9 9.4
------------------------------------------------------------
AIG's operations are negatively impacted under guarantee fund assessment
laws which exist in most states. As a result of operating in a state which has
guarantee fund assessment laws, a
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solvent insurance company may be assessed for certain obligations arising from
the insolvencies of other insurance companies which operated in that state. AIG
generally records these assessments upon notice. Additionally, certain states
permit at least a portion of the assessed amount to be used as a credit against
a company's future premium tax liabilities. Therefore, the ultimate net
assessment cannot reasonably be estimated. The guarantee fund assessments net of
credits for 2000 were $15 million. Based upon current information, AIG does not
anticipate that its net assessment will be significantly different in 2001.
AIG is also required to participate in various involuntary pools
(principally workers' compensation business) which provide insurance coverage
for those not able to obtain such coverage in the voluntary markets. This
participation is also recorded upon notification, as these amounts cannot
reasonably be estimated.
LIFE INSURANCE OPERATIONS
AIG's life insurance subsidiaries offer a wide range of traditional
insurance and financial and investment products. Traditional products consist of
individual and group life, annuity, endowment and accident and health policies.
Financial and investment products consist of single premium annuity, variable
annuities, guaranteed investment contracts, universal life and pensions.
AIG's three principal overseas life operations are American Life Insurance
Company (ALICO), American International Assurance Company, Limited together with
American International Assurance Company (Bermuda) Limited (AIA) and Nan Shan
Life Insurance Company, Ltd. (Nan Shan). ALICO is incorporated in Delaware and
all of its business is written outside of the United States. ALICO has
operations either directly or through subsidiaries in approximately 50 countries
located in Europe, Africa, Latin America, the Caribbean, the Middle East, and
the Far East, with Japan being the largest territory. AIA operates primarily in
Hong Kong, Singapore, Malaysia and Thailand. Nan Shan operates in Taiwan. AIG's
domestic life operations are comprised of three separate operations, the life
insurance subsidiaries of AGC, AIG's domestic life companies and the life
insurance subsidiaries of SunAmerica Inc. (SunAmerica), a Delaware corporation
which owns substantially all of the subsidiaries which were owned by SunAmerica
Inc., the Maryland corporation which was merged into AIG in January 1999. The
domestic subsidiaries of AIG and SunAmerica sell primarily financial and
investment type products, while AGC's subsidiaries sell these as well as
traditional life products. (See also Note (d) of Notes to Financial Statements.)
Life insurance operations for the six month periods ending June 30, 2001
and 2000 were as follows:
(IN MILLIONS)
--------------------------------------------------------------
2001 2000
--------------------------------------------------------------
Premium income:
Domestic $ 2,590 $ 2,398
Foreign 6,603 6,095
--------------------------------------------------------------
Total $ 9,193 $ 8,493
--------------------------------------------------------------
Net investment income:
Domestic $ 4,017 $ 3,609
Foreign 1,735 1,532
--------------------------------------------------------------
Total $ 5,752 $ 5,141
--------------------------------------------------------------
Operating income before realized
capital losses:
Domestic $ 1,512 $ 1,350
Foreign 1,296 1,082
--------------------------------------------------------------
Total 2,808 2,432
Realized capital losses (21) (58)
--------------------------------------------------------------
Operating income $ 2,787 $ 2,374
--------------------------------------------------------------
Life insurance in-force:*
Domestic $ 497,493 $477,576
Foreign 657,396 494,316
--------------------------------------------------------------
Total $1,154,889 $971,892
--------------------------------------------------------------
* Amounts presented were as at June 30, 2001 and December 31, 2000,
respectively. June 30, 2001, included AIG Star Life Insurance Co., Ltd.,
(formerly The Chiyoda Mutual Life Insurance Company).
AIG's life premium income during the first six months of 2001 represented a
8.2 percent increase from the same period in 2000. Foreign life operations
produced 71.8 percent of the life premium income in both 2001 and 2000.
The traditional life products, particularly individual life products, were
major contributors to the growth in foreign premium income. These traditional
life products, coupled with the increased distribution of financial and
investment products contributed to the growth in foreign investment income. A
mixture of traditional, accident and health and financial products are being
sold in Japan through ALICO.
As previously discussed, the U.S. dollar strengthened in value in relation
to most major foreign currencies in which AIG transacts business. Accordingly,
for the first six months of 2001, when foreign life premium income was
translated into U.S. dollars for purposes of the preparation of the consolidated
financial statements, total life premium income was approximately 5.9 percentage
points less than it would have been if translated utilizing exchange rates
prevailing in 2000.
Life insurance net investment income increased 11.9 percent during the
first six months of 2001. The growth in net investment income was primarily
attributable to both foreign and domestic new cash flow for investment. The new
cash flow was generated
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from life insurance operations and included the compounding of previously earned
and reinvested net investment income. (See also the discussion under "Liquidity"
herein.)
Life insurance realized capital losses for the first six months were $21
million in 2001 and $58 million in 2000. These realized capital losses resulted
from the ongoing management of the life insurance investment portfolios within
the overall objectives of the life insurance operations and arose primarily from
the disposition of equity securities and available for sale fixed maturities as
well as redemptions of fixed maturities.
Life insurance operating income during the first six months of 2001
increased 17.4 percent to $2.79 billion. Excluding realized capital losses from
life insurance operating income, the percent increase would be 15.5 percent. The
contribution of life insurance operating income to income before income taxes
and minority interest amounted to 58.7 percent during the first six months of
2001 compared to 50.2 percent in the same period of 2000.
The risks associated with the traditional life and accident and health
products are underwriting risk and investment risk. The risk associated with the
financial and investment contract products is investment risk.
Underwriting risk represents the exposure to loss resulting from the actual
policy experience adversely emerging in comparison to the assumptions made in
the product pricing associated with mortality, morbidity, termination and
expenses. AIG's foreign life companies limit their maximum underwriting exposure
on traditional life insurance of a single life to approximately one million
dollars of coverage and AIG's domestic life companies, including those of AGC,
limit their maximum underwriting exposure on traditional life insurance of a
single life to $2.5 million of coverage by using yearly renewable term
reinsurance.
The investment risk represents the exposure to loss resulting from the cash
flows from the invested assets, primarily long-term fixed rate investments,
being less than the cash flows required to meet the obligations of the expected
policy and contract liabilities and the necessary return on investments.
To minimize its exposure to investment risk, AIG tests the cash flows from
the invested assets and the policy and contract liabilities using various
interest rate scenarios to assess whether there is a liquidity excess or
deficit. If a rebalancing of the invested assets to the policy and contract
claims became necessary and did not occur, a demand could be placed upon
liquidity. (See also the discussion under "Liquidity" herein.)
The asset-liability relationship is appropriately managed in AIG's foreign
operations, as it has been throughout AIG's history, even though certain
territories lack qualified long-term investments or there are investment
restrictions imposed by the local regulatory authorities. For example, in Japan
and several Southeast Asia territories, the duration of the investments is often
for a shorter period than the effective maturity of the related policy
liabilities. Therefore, there is a risk that the reinvestment of the proceeds at
the maturity of the initial investments may be at a yield below that of the
interest required for the accretion of the policy liabilities. At December 31,
2000, the average duration of the investment portfolio in Japan was 6.0 years.
Additionally, there exists a future investment risk associated with certain
policies currently in force which will have premium receipts in the future. That
is, the investment of these future premium receipts may be at a yield below that
required to meet future policy liabilities. The anticipated average period for
the receipt and investment of these future premium receipts is 6.1 years. These
durations compare with an estimated average duration of 10.4 years for the
corresponding policy liabilities. These durations have not changed significantly
during 2001. To maintain an adequate yield to match the interest necessary to
support future policy liabilities, constant management focus is required to
reinvest the proceeds of the maturing securities and to invest the future
premium receipts without sacrificing investment quality. To the extent permitted
under local regulation, AIG may invest in qualified longer-term securities
outside Japan to achieve a closer matching in both duration and the required
yield. AIG is able to manage any asset-liability duration difference through
maintenance of sufficient global liquidity and to support any operational
shortfall through its international financial network. (See also the discussion
under "Liquidity" herein.)
The asset-liability relationship is appropriately managed in AIG's domestic
operations, as there is ample supply of qualified long-term investments.
AIG uses asset-liability matching as a management tool worldwide to
determine the composition of the invested assets and marketing strategies. As a
part of these strategies, AIG may determine that it is economically advantageous
to be temporarily in an unmatched position due to anticipated interest rate or
other economic changes.
FINANCIAL SERVICES OPERATIONS
AIG's financial services subsidiaries engage in diversified financial
products and services including premium financing, banking services and consumer
finance services.
International Lease Finance Corporation (ILFC) engages primarily in the
acquisition of new and used commercial jet aircraft and the leasing and
remarketing of such aircraft to airlines around the world. Also, ILFC provides,
for a fee, fleet management services to certain third-party operators. (See also
Note (d) of Notes to Financial Statements.)
AIG Financial Products Corp. and its subsidiaries (AIGFP) structure
financial transactions, including long-dated interest rate and currency swaps
and structured borrowings through notes, bonds and guaranteed investment
agreements. (See also Note (d) of Notes to Financial Statements.)
American General Finance, Inc. and its subsidiaries (AGF) provide a wide
variety of consumer finance products, including
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mortgages, consumer loans, retail sales finance and credit related insurance to
customers in the United States. (See also Note (d) of Notes to Financial
Statements.)
AIG Trading Group Inc. and its subsidiaries (AIGTG) engage in various
commodities trading, foreign exchange trading, interest rate swaps and market
making activities. (See also Note (d) of Notes to Financial Statements.)
Financial services operations for the six month periods ending June 30,
2001, and 2000 were as follows:
(IN MILLIONS)
-------------------------------------------------------------
2001 2000
-------------------------------------------------------------
REVENUES:
International Lease Finance Corporation $1,278 $1,157
AIG Financial Products Corp.* 519 451
American General Finance, Inc. 995 932
AIG Trading Group Inc.* 59 135
Other 244 127
-------------------------------------------------------------
Total $3,095 $2,802
-------------------------------------------------------------
OPERATING INCOME:
International Lease Finance Corporation $ 344 $ 310
AIG Financial Products Corp. 354 278
American General Finance, Inc. 220 189
AIG Trading Group Inc. 14 35
Other, including intercompany adjustments (11) (38)
-------------------------------------------------------------
Total $ 921 $ 774
-------------------------------------------------------------
* Represents commissions, transaction and other fees.
Financial services operating income increased 19.0 percent in the first six
months of 2001 over 2000.
Financial services operating income represented 19.4 percent of AIG's
income before income taxes and minority interest in the first six months of
2001. This compares to 16.4 percent in the same period of 2000.
ILFC generates its revenues primarily from leasing new and used commercial
jet aircraft to domestic and foreign airlines. Revenues also result from the
remarketing of commercial jets for its own account, for airlines and for
financial institutions. Revenues in the first six months of 2001 increased 10.5
percent from the same period of 2000. The revenue growth resulted primarily from
the increase in flight equipment available for operating lease and the increase
in the relative cost of the leased fleet. Approximately 20 percent of ILFC's
operating lease revenues are derived from U.S. and Canadian airlines. During the
first six months of 2001, operating income increased 11.0 percent from the same
period of 2000. ILFC finances its purchases of aircraft primarily through the
issuance of a variety of debt instruments. The composite borrowing rates at the
end of the first six months of 2001 and 2000 were 5.49 percent and 6.33 percent,
respectively. (See also the discussions under "Capital Resources" and
"Liquidity" herein and Note (d) of Notes to Financial Statements.)
ILFC is exposed to loss through non-performance of aircraft lessees,
through owning aircraft which it would be unable to sell or re-lease at
acceptable rates at lease expiration and through committing to purchase aircraft
which it would be unable to lease. ILFC manages its lessee non-performance
exposure through credit reviews and security deposit requirements. At June 30,
2001, there were 429 aircraft subject to operating leases and there was one
aircraft off lease. (See also the discussions under "Capital Resources" and
"Liquidity" herein.)
AIGFP participates in the derivatives dealer market conducting, primarily
as principal, an interest rate, currency, equity and credit derivative products
business. AIGFP also enters into structured transactions including long-dated
forward foreign exchange contracts, option transactions, liquidity facilities
and investment agreements and invests in a diversified portfolio of securities.
AIGFP derives substantially all its revenues from proprietary positions entered
in connection with counterparty transactions rather than from speculative
transactions. Revenues in the first six months of 2001 increased 15.2 percent
from the same period of 2000. During the first six months of 2001, operating
income increased 27.1 percent from the same period of 2000. As AIGFP is a
transaction-oriented operation, current and past revenues and operating results
may not provide a basis for predicting future performance. (See also the
discussions under "Capital Resources," "Liquidity" and "Derivatives" herein and
Note (d) of Notes to Financial Statements.)
AGF derives a substantial portion of its revenues from finance charges
assessed on outstanding mortgages and finance receivables. Revenues in the first
six months of 2001 increased 6.8 percent from the same period of 2000.
The growth in revenues was generally due to the growth in the average
finance receivables and higher finance margins. During the first six months of
2001, operating income increased 16.4 percent from the same period of 2000. The
increase in operating income resulted from the growth as described above.
AGF is exposed to loss when contractual payments are not received. AGF
manages its collection exposure through the mix of types of loans and security
thereon.
AIGTG derives a substantial portion of their revenues from market making
and trading activities, as principals, in foreign exchange, interest rates and
precious and base metals. Revenues in the first six months of 2001 decreased
56.4 percent from the same period of 2000. During the first six months of 2001,
operating income decreased 60.5 percent from the same period of 2000. As AIGTG
is a transaction-oriented operation, current and past revenues and operating
results may not provide a basis for predicting future performance or for
comparing revenues to operating income. (See also the discussions under "Capital
Resources," "Liquidity" and "Derivatives" herein and Note (d) of Notes to
Financial Statements.)
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American International Group, Inc. and Subsidiaries
AIG Consumer Finance Group, Inc., through its subsidiaries, is engaged in
developing a multi-product consumer finance business with an emphasis on
emerging markets.
ASSET MANAGEMENT OPERATIONS
AIG's asset management operations offer a wide variety of investment vehicles
and services, including variable annuities, mutual funds, and investment asset
management. Such products and services are offered to individuals and
institutions both domestically and internationally.
AIG's four principal asset management operations are SunAmerica's asset
management operations (SAAMCo), AIG Global Investment Group, Inc. and its
subsidiaries (Global Investment) and AIG Capital Partners, Inc. (Cap Partners)
and AGC's asset management operations through The Variable Annuity Life
Insurance Company (VALIC). SAAMCo develops and sells variable annuities and
other investment products, sells and manages mutual funds and provides financial
services. Global Investment manages third-party institutional, retail and
private equity funds invested assets on a global basis, and provides custodial
services. Cap Partners organizes, and manages the invested assets of
institutional investment funds and may also invest in such funds. VALIC provides
tax qualified annuities to the employees of educational, healthcare and
governmental entities. Each of these subsidiary operations receives fees for
investment products and services provided.
Asset management operations for the six month periods ending June 30, 2001
and 2000 were as follows:
(IN MILLIONS)
------------------------------------------------------------
2001 2000
------------------------------------------------------------
REVENUES:
AGC $1,149 $1,112
SunAmerica 348 365
Other 263 228
------------------------------------------------------------
Total $1,760 $1,705
------------------------------------------------------------
OPERATING INCOME:
AGC $ 358 $ 340
SunAmerica 125 153
Other 86 57
------------------------------------------------------------
Total $ 569 $ 550
------------------------------------------------------------
Asset management operating income in the first six months of 2001 increased
3.5 percent when compared to the same period of 2000.
Asset management operating income represented 12.0 percent of AIG's income
before income taxes and minority interest in the first six months of 2001. This
compares to 11.6 percent in the same period of 2000.
At June 30, 2001, AIG's third party assets under management, including both
retail mutual funds and institutional accounts, approximated $38 billion.
OTHER OPERATIONS
Other realized capital losses amounted to $356 million, and $115 million in the
first six months of 2001 and 2000, respectively.
Other income (deductions)-net includes AIG's equity in certain minor
majority-owned subsidiaries and certain partially-owned companies, realized
foreign exchange transaction gains and losses in substantially all currencies
and unrealized gains and losses in hyperinflationary currencies, as well as the
income and expenses of the parent holding company and other miscellaneous income
and expenses. In the first six months of 2001, net deductions amounted to $1.03
billion. In the same period of 2000, net deductions amounted to $625 million.
The cumulative effect of an accounting change resulting from the adoption of
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" and Statement of Financial Accounting
Standards No. 138 "Accounting for Derivative Instruments and Hedging
Activities -- an amendment of FASB Statement No. 133" (collectively, FASB 133)
was a loss of $6 million, net of tax, and is presented as a component of Other
income (deductions)-net.
Income before income taxes and minority interest amounted to $4.76 billion
in the first six months of 2001. Income before income taxes and minority
interest amounted to $4.73 billion in the same period of 2000.
In the first six months of 2001, AIG recorded a provision for income taxes
of $1.37 billion compared to the provision of $1.40 billion in the same period
of 2000. These provisions represent effective tax rates of 28.9 percent in the
first six months of 2001, and 29.6 percent in the same period of 2000.
Minority interest represents minority shareholders' equity in income of
certain majority-owned consolidated subsidiaries. Minority interest amounted to
$209 million and $198 million in the first six months of 2001 and 2000,
respectively.
Net income amounted to $3.17 billion in the first six months of 2001 and
$3.13 billion in the same period of 2000. The increases in net income over the
periods resulted from those factors described above.
CAPITAL RESOURCES
At June 30, 2001, AIG had total capital funds of $50.64 billion and total
borrowings of $64.47 billion. At that date, $58.95 billion of such borrowings
were either not guaranteed by AIG or were matched borrowings under obligations
of guaranteed investment agreements (GIAs) or matched notes and bonds payable.
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Total borrowings and borrowings not guaranteed or matched at June 30, 2001
and December 31, 2000 were as follows:
(IN MILLIONS)
-------------------------------------------------------------
2001 2000
-------------------------------------------------------------
GIAs -- AIGFP $14,977 $13,595
-------------------------------------------------------------
Commercial Paper:
AGC(a) 2,861 1,921
AGF(a) 4,996 5,162
AIG Funding, Inc. 2,024 968
ILFC(a) 4,139 4,259
A.I. Credit Corp. -- 597
AIG Finance (Taiwan) Limited(a) 108 104
AIG Credit Card Company (Taiwan)(a) 47 36
-------------------------------------------------------------
Total 14,175 13,047
-------------------------------------------------------------
Medium Term Notes:
AGF(a) 3,518 3,069
ILFC(a) 4,274 3,175
AIG 656 582
-------------------------------------------------------------
Total 8,448 6,826
-------------------------------------------------------------
Notes and Bonds Payable:
ILFC(a) 6,429 5,529
AIGFP 14,098 8,755
AIG 726 720
AGC(a) 1,339 1,338
AGF(a) 2,402 2,602
-------------------------------------------------------------
Total 24,994 18,944
-------------------------------------------------------------
Loans and Mortgages Payable:
ILFC(a)(b) 415 463
AIG Finance (Hong Kong) Limited(a) 256 346
AIG Consumer Finance Group, Inc.(a) 765 662
AIG 442 440
-------------------------------------------------------------
Total 1,878 1,911
-------------------------------------------------------------
Total Borrowings 64,472 54,323
-------------------------------------------------------------
Borrowings not guaranteed by AIG 31,549 28,666
Matched GIA borrowings 14,977 13,595
Matched notes and bonds payable -- AIGFP 12,426 8,127
-------------------------------------------------------------
58,952 50,388
-------------------------------------------------------------
Remaining borrowings of AIG $ 5,520 $ 3,935
-------------------------------------------------------------
(a) AIG does not guarantee or support these borrowings.
(b) Capital lease obligations.
The maturity distributions of total borrowings at June 30, 2001 and
December 31, 2000 were as follows:
(IN MILLIONS)
-------------------------------------------------------------
2001 2000
-------------------------------------------------------------
Short-term borrowings $18,079 $16,254
Long-term borrowings(a) 46,393 38,069
-------------------------------------------------------------
Total borrowings $64,472 $54,323
-------------------------------------------------------------
(a) Including commercial paper and excluding that portion of long-term debt
maturing in less than one year.
During the first six months of 2001, AIGFP increased the aggregate
principal amount outstanding of its notes and bonds payable to $14.10 billion.
AIGFP uses the proceeds from the issuance of notes and bonds and GIA borrowings
to invest in a diversified portfolio of securities and derivative transactions.
The funds may also be temporarily invested in securities purchased under
agreements to resell. (See also the discussions under "Operational Review",
"Liquidity" and "Derivatives" herein.)
AIG Funding, Inc. (Funding), through the issuance of commercial paper,
fulfills the short-term cash requirements of AIG and its non-insurance
subsidiaries. Funding intends to continue to meet AIG's funding requirements
through the issuance of commercial paper guaranteed by AIG. This issuance of
Funding's commercial paper is subject to the approval of AIG's Board of
Directors. ILFC and A.I. Credit Corp. (AICCO) as well as AIG Credit Card Company
(Taiwan) -- (AIGCCC-Taiwan) and AIG Finance (Taiwan) Limited -- (AIGF-Taiwan),
both consumer finance subsidiaries in Taiwan, AGC and AGF have issued commercial
paper for the funding of their own operations. At June 30, 2001, AIG did not
guarantee or support the commercial paper of any of its subsidiaries other than
Funding. In early 2001, AICCO ceased issuing commercial paper under its program
and the agreement which AIG had provided supporting the commercial paper was
terminated; AICCO's funding requirements are now met through Funding's program.
(See also the discussion under "Derivatives" herein.)
AIG and Funding have entered into syndicated revolving credit facilities
(collectively, the Facility) aggregating $1.5 billion. The Facility consists of
$1.0 billion in a short-term revolving credit facility and a $500 million five
year revolving credit facility. The Facility can be used for general corporate
purposes and also to provide backup for AIG's commercial paper programs
administered by Funding. There are currently no borrowings outstanding under the
Facility, nor were any borrowings outstanding as of June 30, 2001.
AGC and AGF shared in a $6.2 billion unsecured bank credit facility to
support their commercial paper borrowings. There were no borrowings under this
facility as of June 30, 2001. AGC had $400 million in aggregate principal amount
of debt securities registered and available for issuance as of June 30, 2001.
AGF had $1.0 billion in aggregate principal amount of debt securities registered
and available for issuance at June 30, 2001. AGC uses the proceeds from the
issuance of notes and bonds for general corporate purposes. AGF uses the
proceeds from the issuance of notes and bonds for the funding of its finance
receivables.
At June 30, 2001, ILFC had increased the aggregate principal amount
outstanding of its medium term and term notes to $10.70 billion, a net increase
of $2.0 billion, and recorded a net decline in its capital lease obligations of
$48 million and a net decrease in its commercial paper of $120 million. At June
30,
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American International Group, Inc. and Subsidiaries
2001, ILFC had $3.08 billion in aggregate principal amount of debt securities
registered for issuance from time to time. In addition, ILFC has a Euro Medium
Term Note Program for $2.0 billion, under which $771 million in notes were sold
through June 30, 2001.
ILFC has a $4.3 billion Export Credit Facility for use in connection with
the purchase of approximately 75 aircraft to be delivered through 2001. ILFC has
the right, but is not required, to use the facility to fund 85 percent of each
aircraft's purchase price. This facility is guaranteed by various European
Export Credit Agencies. The interest rate varies from 5.75 percent to 5.90
percent on these aircraft depending on the delivery date of the aircraft.
Through June 30, 2001, ILFC borrowed $2.5 billion under this facility.
Borrowings with respect to this facility are included in Notes and Bonds Payable
in the accompanying table of borrowings.
The proceeds of ILFC's debt financing are primarily used to purchase flight
equipment, including progress payments during the construction phase. The
primary sources for the repayment of this debt and the interest expense thereon
are the cash flow from operations, proceeds from the sale of flight equipment
and the rollover and refinancing of the prior debt. (See also the discussions
under "Operational Review" and "Liquidity" herein.)
During the first six months of 2001, AIG issued $129 million principal
amount of Medium Term Notes and $55 million of previously issued notes matured.
At June 30, 2001, AIG had $652 million in aggregate principal amount of debt
securities registered for issuance from time to time.
AIG's capital funds increased $3.20 billion during the first six months of
2001. Unrealized appreciation of investments, net of taxes increased $557
million. During the first six months of 2001, the cumulative translation
adjustment loss, net of taxes, increased $245 million. The change from period to
period with respect to the unrealized appreciation of investments, net of taxes
was primarily impacted by the decline in domestic interest rates. The transfer
of bonds in the held to maturity, at amortized cost category to the bonds
available for sale, at market value category in accordance with the transition
provisions of FASB 133 resulted in a gain of $339 million recorded in the
statement of comprehensive income as a cumulative effect of an accounting change
adjustment. (See also the discussion under "Operational Review" and "Liquidity"
herein.) At June 30, 2001, capital funds included a cumulative effect of an
accounting change adjustment gain of $150 million. During the first six months
of 2001, there was a loss of $149 million, net of taxes relating to derivative
contracts designated as cash flow hedging instruments. (See also the discussion
under Notes to Financial Statements and the Consolidated Statement of
Comprehensive Income.) During the first six months of 2001, retained earnings
increased $2.76 billion, resulting from net income less dividends.
During the period from January 2001 through June 30, 2001, AIG repurchased
in the open market 2,795,000 shares of its common stock. AIG intends to continue
to buy its common shares in the open market for general corporate purposes,
including to satisfy its obligations under various employee benefit plans.
Payments of dividends to AIG by its insurance subsidiaries are subject to
certain restrictions imposed by statutory authorities. AIG has in the past
reinvested most of its unrestricted earnings in its operations and believes such
continued reinvestment in the future will be adequate to meet any foreseeable
capital needs. However, AIG may choose from time to time to raise additional
funds through the issuance of additional securities. At June 30, 2001, there
were no significant statutory or regulatory issues which would impair AIG's
financial condition, results of operations or liquidity. To AIG's knowledge, no
AIG company is on any regulatory or similar "watch list". (See also the
discussion under "Liquidity" herein.)
AIG's insurance subsidiaries, in common with other insurers, are subject to
regulation and supervision by the states and jurisdictions in which they do
business. The National Association of Insurance Commissioners (NAIC) has
developed Risk-Based Capital (RBC) requirements. RBC relates an individual
insurance company's statutory surplus to the risk inherent in its overall
operations. At June 30, 2001, the adjusted capital of each of AIG's domestic
general companies and of each of AIG's domestic life companies exceeded each of
their RBC standards by considerable margins.
A substantial portion of AIG's general insurance business and a majority of
its life insurance business are conducted in foreign countries. The degree of
regulation and supervision in foreign jurisdictions varies from minimal in some
to stringent in others. Generally, AIG, as well as the underwriting companies
operating in such jurisdictions, must satisfy local regulatory requirements.
Licenses issued by foreign authorities to AIG subsidiaries are subject to
modification and revocation. Thus, AIG's insurance subsidiaries could be
prevented from conducting future business in certain of the jurisdictions where
they currently operate. AIG's international operations include operations in
various developing nations. Both current and future foreign operations could be
adversely affected by unfavorable political developments up to and including
nationalization of AIG's operations without compensation. Adverse effects
resulting from any one country may impact AIG's results of operations, liquidity
and financial condition depending on the magnitude of the event and AIG's net
financial exposure at that time in that country.
LIQUIDITY
AIG's liquidity is primarily derived from the operating cash flows of its
general and life insurance operations.
At June 30, 2001, AIG's consolidated invested assets included $11.90
billion of cash and short-term investments. Consolidated net cash provided from
operating activities in the first six months of 2001 amounted to $2.11 billion.
Sources of funds considered in meeting the objectives of AIG's financial
services operations include guaranteed investment agree-
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ments, issuance of long and short-term debt, maturities and sales of securities
available for sale, securities sold under repurchase agreements, trading
liabilities, securities and spot commodities sold but not yet purchased,
issuance of equity, and cash provided from such operations. AIG's strong capital
position is integral to managing this liquidity, as it enables AIG to raise
funds in diverse markets worldwide. (See also the discussions under "Capital
Resources" herein.)
Management believes that AIG's liquid assets, its net cash provided by
operations, and access to the capital markets will enable it to meet any
foreseeable cash requirements.
The liquidity of the combined insurance operations is derived both
domestically and abroad. The combined insurance operating cash flow is derived
from two sources, underwriting operations and investment operations. In the
aggregate, AIG's insurance operations generated approximately $13.6 billion in
pre-tax cash flow during the first six months of 2001. Cash flow includes
periodic premium collections, including policyholders' contract deposits, paid
loss recoveries less reinsurance premiums, losses, benefits, acquisition and
operating expenses. Generally, there is a time lag from when premiums are
collected and, when as a result of the occurrence of events specified in the
policy, the losses and benefits are paid. AIG's insurance investment operations
generated approximately $7.1 billion in investment income cash flow during the
first six months of 2001. Investment income cash flow is primarily derived from
interest and dividends received and includes realized capital gains net of
realized capital losses.
In addition to the combined insurance pre-tax operating cash flow, AIG's
insurance operations held $11.06 billion in cash and short-term investments at
June 30, 2001. The aforementioned operating cash flow and the cash and
short-term balances held provided AIG's insurance operations with a significant
amount of liquidity.
This liquidity is available, among other things, to purchase high quality
and diversified fixed income securities and to a lesser extent marketable equity
securities and to provide mortgage loans on real estate, policy loans and
collateral loans. This cash flow coupled with proceeds of approximately $38
billion from the maturities, sales and redemptions of fixed income securities
and from the sale of equity securities was used to purchase approximately $49
billion of fixed income securities and marketable equity securities during the
first six months of 2001.
The following table is a summary of AIG's invested assets by significant
segment, including investment income due and accrued of $3.56 billion and $3.52
billion and real estate of $1.98 billion and $2.08 billion, at June 30, 2001 and
December 31, 2000, respectively:
(DOLLARS IN MILLIONS)
---------------------------------------------------------------------------------------------------------------
JUNE 30, 2001 DECEMBER 31, 2000
-------------------- --------------------
INVESTED PERCENT INVESTED PERCENT
ASSETS OF TOTAL ASSETS OF TOTAL
---------------------------------------------------------------------------------------------------------------
General insurance $ 43,401 13.0% $ 42,892 14.1%
Life insurance 192,655 57.6 171,019 56.2
Financial services and asset management 97,290 29.1 89,479 29.4
Other 891 0.3 831 0.3
---------------------------------------------------------------------------------------------------------------
Total $334,237 100.0% $304,221 100.0%
---------------------------------------------------------------------------------------------------------------
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American International Group, Inc. and Subsidiaries
INSURANCE INVESTED ASSETS
The following tables summarize the composition of AIG's insurance invested
assets by insurance segment, including investment income due and accrued and
real estate, at June 30, 2001 and December 31, 2000:
(DOLLARS IN MILLIONS)
--------------------------------------------------------------------------------------------------------------------------------
PERCENT DISTRIBUTION
GENERAL LIFE PERCENT ---------------------
JUNE 30, 2001 INSURANCE INSURANCE TOTAL OF TOTAL DOMESTIC FOREIGN
--------------------------------------------------------------------------------------------------------------------------------
Fixed maturities:
Available for sale, at market value(a) $29,763 $148,153 $177,916 75.4% 73.4% 26.6%
Equity securities, at market value(b) 4,531 3,006 7,537 3.2 59.5 40.5
Mortgage loans on real estate, policy and collateral
loans 66 17,004 17,070 7.2 73.7 26.3
Short-term investments, including time deposits, and
cash 1,809 9,246 11,055 4.7 70.8 29.2
Real estate 410 1,473 1,883 0.8 20.8 79.2
Investment income due and accrued 563 2,864 3,427 1.4 65.9 34.1
Other invested assets 6,259 10,909 17,168 7.3 76.5 23.5
--------------------------------------------------------------------------------------------------------------------------------
Total $43,401 $192,655 $236,056 100.0% 72.6% 27.4%
--------------------------------------------------------------------------------------------------------------------------------
(a) Includes $822 million of bonds trading securities, at market value.
(b) Includes $1.36 billion of non-redeemable preferred stocks, at market value.
(DOLLARS IN MILLIONS)
-------------------------------------------------------------------------------------------------------------------------------
PERCENT DISTRIBUTION
GENERAL LIFE PERCENT --------------------
DECEMBER 31, 2000 INSURANCE INSURANCE TOTAL OF TOTAL DOMESTIC FOREIGN
-------------------------------------------------------------------------------------------------------------------------------
Fixed maturities:
Available for sale, at market value(a) $18,168 $135,212 $153,380 71.7% 71.6% 28.4%
Held to maturity, at amortized cost 11,533 -- 11,533 5.4 100.0 --
Equity securities, at market value(b) 4,666 3,112 7,778 3.6 60.0 40.0
Mortgage loans on real estate, policy and collateral
loans 65 16,860 16,925 7.9 74.0 26.0
Short-term investments, including time deposits, and
cash 1,448 4,839 6,287 2.9 51.6 48.4
Real estate 408 1,565 1,973 0.9 25.3 74.7
Investment income due and accrued 584 2,773 3,357 1.6 64.0 36.0
Other invested assets 6,020 6,658 12,678 6.0 88.4 11.6
-------------------------------------------------------------------------------------------------------------------------------
Total $42,892 $171,019 $213,911 100.0% 72.8% 27.2%
-------------------------------------------------------------------------------------------------------------------------------
(a) Includes $846 million of bonds trading securities, at market value.
(b) Includes $1.19 billion of non-redeemable preferred stocks, at market value.
Generally, insurance regulations restrict the types of assets in which an
insurance company may invest.
With respect to fixed maturities, AIG's general strategy is to invest in
high quality securities while maintaining diversification to avoid significant
exposure to issuer, industry and/or country concentrations. With respect to
general insurance, AIG's strategy is to invest in longer duration fixed
maturities to maximize the yields at the date of purchase. With respect to life
insurance, AIG's strategy is to produce cash flows required to meet maturing
insurance liabilities. (See also the discussion under "Operational Review: Life
Insurance Operations" herein.)
The fixed maturity available for sale portfolio is subject to decline in
fair value as interest rates rise. Such declines in fair value are presented as
a component of comprehensive income in unrealized appreciation of investments,
net of taxes.
At June 30, 2001, approximately 73 percent of the fixed maturities
investments were domestic securities. Approximately 30 percent of such domestic
securities were rated AAA. Approximately 9 percent were below investment grade
or not rated.
A significant portion of the foreign insurance fixed income portfolio is
rated by Moody's, Standard & Poor's (S&P) or similar foreign services. Similar
credit quality rating services are not available in all overseas locations. AIG
annually reviews the credit quality of the foreign portfolio nonrated fixed
income investments, including mortgages. At June 30, 2001, approximately 11
percent of the foreign fixed income investments were either rated AAA or, on the
basis of AIG's internal analysis, were equivalent from a credit standpoint to
securities so rated. Approximately 16 percent were below investment grade or not
rated at that date. A large portion of the foreign insurance fixed income
portfolio are sovereign
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fixed maturity securities supporting the policy liabilities in the country of
issuance.
At June 30, 2001, approximately 16 percent of the fixed maturities
portfolio was collateralized mortgage obligations (CMOs), including commercial
mortgage backed securities. Substantially all of the CMOs were investment grade
and approximately 30 percent of the CMOs were backed by various U.S. government
agencies. CMOs are exposed to interest rate risk as the duration and ultimate
realized yield would be affected by the accelerated prepayments of the
underlying mortgages.
Any fixed income security may be subject to downgrade for a variety of
reasons subsequent to any balance sheet date.
AIG invests in equities for various reasons, including diversifying its
overall exposure to interest rate risk. Equity securities are subject to
declines in fair value. Such declines in fair value are presented in unrealized
appreciation of investments, net of taxes as a component of comprehensive
income.
Mortgage loans on real estate, policy and collateral loans comprised 7.2
percent of AIG's insurance invested assets at June 30, 2001. AIG's insurance
operations' holdings of real estate mortgages amounted to $10.95 billion of
which 86.5 percent was domestic. At June 30, 2001, only a nominal amount were in
default. It is AIG's practice to maintain a maximum loan to value ratio of 75
percent at loan origination. At June 30, 2001, AIG's insurance holdings of
collateral loans amounted to $815 million, all of which were foreign. It is
AIG's strategy to enter into mortgage and collateral loans as an adjunct
primarily to life insurance fixed maturity investments. AIG's policy loans
decreased from $5.47 billion at December 31, 2000 to $5.30 billion at June 30,
2001.
Short-term investments represent amounts invested in various internal and
external money market funds, time deposits and cash held.
AIG's real estate investment properties are primarily occupied by AIG's
various operations. The current market value of these properties considerably
exceeds their carrying value.
Other invested assets were primarily comprised of both foreign and domestic
private placements, limited partnerships and outside managed funds.
When permitted by regulatory authorities and when deemed necessary to
protect insurance assets, including invested assets, from adverse movements in
foreign currency exchange rates, interest rates and equity prices, AIG and its
insurance subsidiaries may enter into derivative transactions as end users. To
date, such activities have not been significant. (See also the discussion under
"Derivatives" herein.)
In certain jurisdictions, significant regulatory and/or foreign
governmental barriers exist which may not permit the immediate free flow of
funds between insurance subsidiaries or from the insurance subsidiaries to AIG
parent. These barriers generally cause only minor delays in the outward
remittance of the funds.
AIG's insurance operations are exposed to market risk. Market risk is the
risk of loss of fair value resulting from adverse fluctuations in interest and
foreign currency exchange rates and equity prices.
Measuring potential losses in fair values has recently become the focus of
risk management efforts by many companies. Such measurements are performed
through the application of various statistical techniques. One such technique is
Value at Risk (VaR). VaR is a summary statistical measure that uses historical
interest and foreign currency exchange rates and equity prices and estimates the
volatility and correlation of each of these rates and prices to calculate the
maximum loss that could occur over a defined period of time given a certain
probability.
AIG believes that statistical models alone do not provide a reliable method
of monitoring and controlling market risk. While VaR models are relatively
sophisticated, the quantitative market risk information generated is limited by
the assumptions and parameters established in creating the related models.
Therefore, such models are tools and do not substitute for the experience or
judgment of senior management.
AIG has performed a VaR analysis to estimate the maximum potential loss of
fair value for each of AIG's insurance segments and for each market risk within
each insurance segment. In this analysis, financial instrument assets include
the domestic and foreign invested assets excluding real estate and investment
income due and accrued. Financial instrument liabilities include reserve for
losses and loss expenses, reserve for unearned premiums, future policy benefits
for life and accident and health insurance contracts and policyholders' funds.
Due to the nature of each insurance segment, AIG manages the general and
life insurance operations separately. As a result, AIG manages separately the
invested assets of each. Accordingly, the VaR analysis was separately performed
for the general and the life insurance operations.
AIG calculated the VaR with respect to the net fair value of each of AIG's
insurance segments as of June 30, 2001 and December 31, 2000. AIG's methodology
for calculating VaR and the results of the calculations presented herein were
performed using historical simulation. Using historical simulation over the
delta-normal approach does not significantly change the results of this
disclosure. The historical simulation methodology entails re-pricing all assets
and liabilities under explicit changes in market rates within a specific
historical time period. In this case, the most recent three years of historical
market information for interest rates, foreign exchange rates, and equity index
prices were used to construct the historical scenarios. For each scenario, each
transaction was re-priced. Portfolio, business unit and finally AIG-wide
scenario values were then calculated by netting the values of all the underlying
assets and liabilities. The final VaR number represents the maximum potential
loss incurred by these scenarios with 95% confidence (i.e., only 5% of
historical scenarios show losses greater than the VaR figure). A one month
holding period was assumed in computing the VaR figure.
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The following table presents the VaR on a combined basis and of each component
of market risk for each of AIG's insurance segments as of June 30, 2001 and
December 31, 2000. VaR with respect to combined operations cannot be derived by
aggregating the individual risk or segment amounts presented herein.
(IN MILLIONS)
--------------------------------------------------------------------------------------------------------------------
GENERAL
INSURANCE LIFE INSURANCE
----------------- ---------------------
MARKET RISK 2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------------
Combined $837 $744 $1,354 $1,456
Interest rate 460 454 1,364 1,422
Currency 44 59 183 373
Equity 812 603 375 384
--------------------------------------------------------------------------------------------------------------------
The following table presents the average, high and low VaRs on a combined basis
and of each component of market risk for each of AIG's insurance segments as of
June 30, 2001 and December 31, 2000.
(IN MILLIONS)
------------------------------------------------------------------------------------------------------------------------
2001 2000
--------------------------- ---------------------------
AVERAGE HIGH LOW AVERAGE HIGH LOW
------------------------------------------------------------------------------------------------------------------------
GENERAL INSURANCE
Market Risk
Combined $ 799 $ 837 $ 744 $ 811 $ 954 $ 737
Interest rate 459 464 454 419 454 338
Currency 51 59 44 49 65 29
Equity 740 812 603 694 828 603
LIFE INSURANCE
Market Risk
Combined $1,405 $1,456 $1,354 $1,355 $1,456 $1,254
Interest rate 1,393 1,422 1,364 1,296 1,422 1,169
Currency 278 373 183 430 566 372
Equity 380 384 375 423 384 462
------------------------------------------------------------------------------------------------------------------------
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FINANCIAL SERVICES AND ASSET MANAGEMENT INVESTED ASSETS
The following table is a summary of the composition of AIG's financial services
and asset management invested assets at June 30, 2001 and December 31, 2000.
(See also the discussions under "Operational Review: Financial Services
Operations", "Operational Review: Asset Management Operations", "Capital
Resources" and "Derivatives" herein.)
(DOLLARS IN MILLIONS)
----------------------------------------------------------------------------------------------------------
2001 2000
-------------------- --------------------
INVESTED PERCENT INVESTED PERCENT
ASSETS OF TOTAL ASSETS OF TOTAL
----------------------------------------------------------------------------------------------------------
Flight equipment primarily under operating leases, net of
accumulated depreciation $21,674 22.3% $19,325 21.6%
Finance receivables, net of allowance 11,448 11.8 11,378 12.7
Unrealized gain on interest rate and currency swaps, options
and forward transactions 10,746 11.0 10,235 11.5
Securities available for sale, at market value 17,027 17.5 14,669 16.4
Trading securities, at market value 6,523 6.7 7,347 8.2
Securities purchased under agreements to resell, at contract
value 17,692 18.2 14,979 16.7
Trading assets 7,503 7.7 7,045 7.9
Spot commodities, at market value 316 0.3 363 0.4
Other, including short-term investments 4,361 4.5 4,138 4.6
----------------------------------------------------------------------------------------------------------
Total $97,290 100.0% $89,479 100.0%
----------------------------------------------------------------------------------------------------------
As previously discussed, the cash used for the purchase of flight equipment
is derived primarily from the proceeds of ILFC's debt financings. The primary
sources for the repayment of this debt and the interest expense thereon are the
cash flow from operations, proceeds from the sale of flight equipment and the
rollover and refinancing of the prior debt. During the first six months of 2001,
ILFC acquired flight equipment costing $2.80 billion.
ILFC is exposed to market risk and the risk of loss of fair value resulting
from adverse fluctuations in interest rates. As of June 30, 2001 and December
31, 2000, AIG statistically measured the aforementioned loss of fair value
through the application of a VaR model. In this analysis, the net fair value of
ILFC was determined using the financial instrument assets which included the tax
adjusted future flight equipment lease revenue and the financial instrument
liabilities which included the future servicing of the current debt. The
estimated impact of the current derivative positions was also taken into
account.
AIG calculated the VaR with respect to the net fair value of ILFC using the
historical simulation methodology, as previously described. As of June 30, 2001
and December 31, 2000, the VaR with respect to the aforementioned net fair value
of ILFC was approximately $8 million and $11 million, respectively.
AIGFP's derivative transactions are carried at market value or at estimated
fair value when market prices are not readily available. AIGFP reduces its
economic risk exposure through similarly valued offsetting transactions
including swaps, trading securities, options, forwards and futures. The
estimated fair values of these transactions represent assessments of the present
value of expected future cash flows. These transactions are exposed to liquidity
risk if AIGFP were to sell or close out the transactions prior to maturity. AIG
believes that the impact of any such limited liquidity would not be significant
to AIG's financial condition or its overall liquidity. (See also the discussion
under "Operational Review: Financial Services Operations" and "Derivatives"
herein.)
AIGFP uses the proceeds from the issuance of notes and bonds and GIA
borrowings to invest in a diversified portfolio of securities, including
securities available for sale, at market, and derivative transactions. The funds
may also be temporarily invested in securities purchased under agreements to
resell. The proceeds from the disposal of the aforementioned securities
available for sale and securities purchased under agreements to resell have been
used to fund the maturing GIAs or other AIGFP financings. (See also the
discussion under "Capital Resources" herein.)
Securities available for sale is mainly a portfolio of debt securities,
where the individual securities have varying degrees of credit risk. At June 30,
2001, the average credit rating of this portfolio was AA or the equivalent
thereto as determined through rating agencies or internal review. AIGFP has also
entered into credit derivative transactions to hedge its credit risk associated
with $182 million of these securities. There were no securities deemed below
investment grade at June 30, 2001. There have been no significant downgrades
through August 1, 2001. Securities purchased under agreements to resell are
treated as collateralized transactions. AIGFP takes possession of or obtains a
security interest in securities purchased under agreements to resell. AIGFP
further minimizes its credit risk by monitoring counterparty credit exposure
and, when AIGFP deems necessary, it requires additional collateral to be
deposited. Trading securities, at market value are marked to
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American International Group, Inc. and Subsidiaries
market daily and are held to meet the short-term risk management objectives of
AIGFP.
AIGTG conducts, as principal, market making and trading activities in
foreign exchange, interest rates and precious and base metals. AIGTG owns
inventories in the commodities in which it trades and may reduce the exposure to
market risk through the use of swaps, forwards, futures and option contracts.
AIGTG uses derivatives to manage the economic exposure of its various trading
positions and transactions from adverse movements of interest rates, foreign
currency exchange rates and commodity prices. AIGTG supports its trading
activities largely through trading liabilities, unrealized losses on swaps,
short-term borrowings, securities sold under agreements to repurchase and
securities and commodities sold but not yet purchased. (See also the discussions
under "Capital Resources" and "Derivatives" herein.)
The gross unrealized gains and gross unrealized losses of AIGFP and AIGTG
included in the financial services assets and liabilities at June 30, 2001 were
as follows:
(IN MILLIONS)
-------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
-------------------------------------------------------------
Securities available for sale, at
market value $ 846 $ 814
Unrealized gain/loss on interest
rate and currency swaps, options
and forward transactions(a)(b) 10,746 7,948
Trading assets 8,010 6,178
Spot commodities, at market value 28 --
Trading liabilities -- 2,303
Securities and spot commodities
sold but not yet purchased, at
market value 505 --
-------------------------------------------------------------
(a) These amounts are also presented as the respective balance sheet amounts.
(b) At June 30, 2001, AIGTG's replacement values with respect to interest rate
and currency swaps were $410 million.
AIGFP's interest rate and currency risks on securities available for sale,
at market, are managed by taking offsetting positions on a security by security
basis, thereby offsetting a significant portion of the unrealized appreciation
or depreciation. At June 30, 2001, the unrealized gains and losses remaining
after the benefit of the offsets were $51 million and $19 million, respectively.
Trading securities, at market value, and securities and spot commodities
sold but not yet purchased, at market value are marked to market daily with the
unrealized gain or loss being recognized in income at that time. These
securities and positions are held to meet the short-term risk management
objectives of AIGFP and AIGTG.
The senior management of AIG defines the policies and establishes general
operating parameters for AIGFP and AIGTG. AIG's senior management has
established various oversight committees to review the various financial market,
operational and credit issues of AIGFP and AIGTG. The senior managements of
AIGFP and AIGTG report the results of their respective operations to and review
future strategies with AIG's senior management.
AIG actively manages the exposures to limit potential losses, while
maximizing the rewards afforded by these business opportunities. In doing so,
AIG must continually manage a variety of exposures including credit, market,
liquidity, operational and legal risks.
Market risk arises principally from the uncertainty that future earnings
are exposed to potential changes in volatility, interest rates, foreign currency
exchange rates, and equity and commodity prices. AIG generally controls its
exposure to market risk by taking offsetting positions. AIG's philosophy with
respect to its financial services operations is to minimize or set limits for
open or uncovered positions that are to be carried. Credit risk exposure is
separately managed. (See the discussion on the management of credit risk below.)
AIG's Market Risk Management Department provides detailed independent
review of AIG's market exposures, particularly those market exposures of AIGFP
and AIGTG. This department determines whether AIG's market risks, as well as
those market risks of individual subsidiaries, are within the parameters
established by AIG's senior management. Well established market risk management
techniques such as sensitivity analysis are used. Additionally, this department
verifies that specific market risks of each of certain subsidiaries are managed
and hedged by that subsidiary.
AIGFP is exposed to market risk due to changes in the level and volatility
of interest rates and the shape and slope of the yield curve. AIGFP hedges its
exposure to interest rate risk by entering into transactions such as interest
rate swaps and options and purchasing U.S. and foreign government obligations.
AIGFP is exposed to market risk due to changes in and volatility of foreign
currency exchange rates. AIGFP hedges its foreign currency exchange risk
primarily through the use of currency swaps, options, forwards and futures.
AIGFP is exposed to market risk due to changes in the level and volatility
of equity prices which affect the value of securities or instruments that derive
their value from a particular stock, a basket of stocks or a stock index. AIGFP
reduces the risk of loss inherent in its inventory in equity securities by
entering into hedging transactions, including equity swaps and options and
purchasing U.S. and foreign government obligations.
AIGFP does not seek to manage the market risk of each of its transactions
through an individual offsetting transaction. Rather, AIGFP takes a portfolio
approach to the management of its market risk exposure. AIGFP values its
portfolio at market value or estimated fair value when market values are not
readily available. These valuations represent an assessment of the present
values of expected future cash flows of AIGFP's transactions and may include
reserves for such risks as are deemed appropriate by AIGFP's and AIG's
management. AIGFP evaluates the portfolio's discounted cash flows with reference
to current market conditions, maturities within the portfolio and other relevant
factors. Based upon this
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evaluation, AIGFP determines what, if any, offsetting transactions are necessary
to reduce the market risk exposure of the portfolio.
The aforementioned estimated fair values are based upon the use of
valuation models. These models utilize, among other things, current interest,
foreign exchange and volatility rates. These valuation models are integrated
into the evaluation of the portfolio, as described above, in order to provide
timely information for the market risk management of the portfolio.
Additionally, depending upon the changes in interest rates and other market
movements during the day, the system will produce reports for management's
consideration for intra-day offsetting positions. Overnight, the system
generates reports which recommend the types of offsets management should
consider for the following day. Additionally, AIGFP operates in major business
centers overseas and is essentially open for business 24 hours a day. Thus, the
market exposure and offset strategies are monitored, reviewed and coordinated
around the clock. Therefore, offsetting adjustments can be made as and when
necessary from any AIGFP office in the world.
As part of its monitoring and controlling of its exposure to market risk,
AIGFP applies various testing techniques which reflect potential market
movements. These techniques vary by currency and are regularly changed to
reflect factors affecting the derivatives portfolio. In addition to the daily
monitoring, AIGFP's senior management and local risk managers conduct a weekly
review of the derivatives portfolio and existing hedges. This review includes an
examination of the portfolio's risk measures, such as aggregate option
sensitivity to movements in market variables. AIGFP's management may change
these measures to reflect their judgment and evaluation of the dynamics of the
markets. This management group will also determine whether additional or
alternative action is required in order to manage the portfolio.
All of AIGTG's market risk sensitive instruments are entered into for
trading purposes. The fair values of AIGTG's financial instruments are exposed
to market risk as a result of adverse market changes in interest rates, foreign
currency exchange rates, commodity prices and adverse changes in the liquidity
of the markets in which AIGTG trades.
AIGTG's approach to managing market risk is to establish an appropriate
offsetting position to a particular transaction or group of transactions
depending upon the extent of market risk AIGTG expects to reduce.
AIGTG's senior management has established positions and stop-loss limits
for each line of business. AIGTG's traders are required to maintain positions
within these limits. These positions are monitored during the day either
manually and/or through on-line computer systems. In addition, these positions
are reviewed by AIGTG's management. Reports which present each trading books
position and the prior day's profit and loss are reviewed by traders, head
traders and AIGTG's senior management. Based upon these and other reports,
AIGTG's senior management may determine to adjust AIGTG's risk profile.
AIGTG attempts to secure reliable current market prices, such as published
prices or third party quotes, to value its derivatives. Where such prices are
not available, AIGTG uses an internal methodology which includes interpolation
or extrapolation from verifiable prices nearest to the dates of the
transactions. The methodology may reflect interest and exchange rates, commodity
prices, volatility rates and other relevant factors.
A significant portion of AIGTG's business is transacted in liquid markets.
Certain of AIGTG's derivative product exposures are evaluated using simulation
techniques which consider such factors as changes in currency and commodity
prices, interest rates, volatility levels and the effect of time.
AIGFP and AIGTG are both exposed to the risk of loss of fair value from
adverse fluctuations in interest rate and foreign currency exchange rates and
equity and commodity prices. AIG statistically measured the losses of fair value
through the application of a VaR model. AIG separately calculated the VaR with
respect to AIGFP and AIGTG, as AIG manages these operations separately.
AIGFP's and AIGTG's asset and liability portfolios for which the VaR
analyses were performed included over the counter and exchange traded
investments, derivative instruments and commodities. Since the market risk with
respect to securities available for sale, at market is substantially hedged,
segregation of market sensitive instruments into trading and other than trading
was not deemed necessary.
AIG calculated the VaR with respect to AIGFP and AIGTG as of June 30, 2001
and December 31, 2000. AIG's methodology for calculating VaR and the results of
the calculations presented herein were performed using historical simulation.
Using historical simulation over the delta-normal approach does not
significantly change the results of this disclosure. The historical simulation
methodology entails re-pricing all assets and liabilities under explicit changes
in market rates within a specific historical time period. In this case, the most
recent three years of historical market information for interest rates, foreign
exchange rates, and equity index prices were used to construct the historical
scenarios. For each scenario, each transaction was re-priced. Portfolio,
business unit and finally AIG-wide scenario values were then calculated by
netting the values of all the underlying assets and liabilities. The final VaR
number represents the maximum potential loss incurred by these scenarios with
95% confidence (i.e., only 5% of historical scenarios show losses greater than
the VaR figure).
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The following table presents the VaR on a combined basis and of each
component of AIGFP's and AIGTG's market risk as of June 30, 2001 and December
31, 2000. VaR with respect to combined operations cannot be derived by
aggregating the individual risk presented herein.
(IN MILLIONS)
------------------------------------------------------------------
AIGFP(A) AIGTG(B)
------------ ------------
MARKET RISK 2001 2000 2001 2000
-----------------------------------------------------------
Combined $12 $15 $2 $6
Interest rate 11 15 2 4
Currency -- -- 2 3
Equity/Commodity 1 -- -- --
-----------------------------------------------------------
(a) A one month holding period was used to measure the market exposures of
AIGFP.
(b) A one day holding period was used to measure the market exposures of AIGTG.
The following table presents the average, high and low VaRs on a combined
basis and of each component of AIGFP's and AIGTG's market risk as of June 30,
2001 and December 31, 2000.
(IN MILLIONS)
--------------------------------------------------------------------------------------------------------------
2001 2000
---------------------- ----------------------
AVERAGE HIGH LOW AVERAGE HIGH LOW
--------------------------------------------------------------------------------------------------------------
AIGFP MARKET RISK:
Combined $12 $15 $10 $15 $24 $8
Interest rate 12 15 10 15 23 7
Currency -- 1 -- -- -- --
Equity/Commodity 1 1 -- 1 2 --
AIGTG MARKET RISK:
Combined $ 4 $ 6 $2 $ 5 $ 6 $4
Interest Rate 3 4 2 3 4 3
Currency 2 3 1 3 4 2
--------------------------------------------------------------------------------------------------------------
DERIVATIVES
Derivatives are financial arrangements among two or more parties whose returns
are linked to or "derived" from some underlying equity, debt, commodity or other
asset, liability, or index. Derivatives payments may be based on interest rates
and exchange rates and/or prices of certain securities, certain commodities, or
financial or commodity indices. The more significant types of derivative
arrangements in which AIG transacts are swaps, forwards, futures, options and
related instruments.
The most commonly used swaps are interest rate swaps, currency swaps,
equity swaps and swaptions. Such derivatives are traded over the counter. An
interest rate swap is a contract between two parties to exchange interest rate
payments (typically a fixed interest rate versus a variable interest rate)
calculated on a notional principal amount for a specified period of time. The
notional amount is not exchanged. Currency and equity swaps are similar to
interest rate swaps but may involve the exchange of principal amounts at the
commencement and termination of the swap. Swaptions are options where the holder
has the right but not the obligation to enter into a swap transaction or cancel
an existing swap transaction.
A futures or forward contract is a legal contract between two parties to
purchase or sell at a specified future date a specified quantity of a commodity,
security, currency, financial index or other instrument, at a specified price. A
futures contract is traded on an exchange, while a forward contract is executed
over the counter.
Over the counter derivatives are not transacted in an exchange traded
environment. The futures exchanges maintain considerable financial requirements
and surveillance to ensure the integrity of exchange traded futures and options.
An option contract generally provides the option purchaser with the right
but not the obligation to buy or sell during a period of time or at a specified
date the underlying instrument at a set
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price. The option writer is obligated to sell or buy the underlying item if the
option purchaser chooses to exercise his right. The option writer receives a
nonrefundable fee or premium paid by the option purchaser. Options may be traded
over the counter or on an exchange.
Derivatives are generally either negotiated over the counter contracts or
standardized contracts executed on an exchange. Standardized exchange traded
derivatives include futures and options which can be readily bought or sold over
recognized security or commodity exchanges and settled daily through such
clearing houses. Negotiated over the counter derivatives include forwards, swaps
and options. Over the counter derivatives are generally not traded like exchange
traded securities and the terms of over the counter derivatives are non-standard
and unique to each contract. However, in the normal course of business, with the
agreement of the original counterparty, these contracts may be terminated early
or assigned to another counterparty.
All significant derivatives activities are conducted through AIGFP and
AIGTG permitting AIG to participate in the derivatives dealer market acting
primarily as principal. In these derivative operations, AIG structures
agreements which generally allow its counterparties to enter into transactions
with respect to changes in interest and exchange rates, securities' prices and
certain commodities and financial or commodity indices. Generally, derivatives
are used by AIG's customers such as corporations, financial institutions,
multinational organizations, sovereign entities, government agencies and
municipalities. For example, a futures, forward or option contract can be used
to protect the customers' assets or liabilities against price fluctuations.
A counterparty may default on any obligation to AIG, including a derivative
contract. Credit risk is a consequence of extending credit and/or carrying
trading and investment positions. Credit risk exists for a derivative contract
when that contract has an estimated positive fair value. To help manage this
risk, the credit departments of AIGFP and AIGTG operate within the guidelines of
the AIG Credit Risk Committee, which sets credit policy and limits for
counterparties and provides limits for derivative transactions with
counterparties having different credit ratings. In addition to credit ratings,
this committee takes into account other factors, including the industry and
country of the counterparty. Transactions which fall outside these
pre-established guidelines require the approval of the AIG Credit Risk
Committee. It is also AIG's policy to establish reserves for potential credit
impairment when necessary.
AIGFP and AIGTG determine the credit quality of each of their
counterparties taking into account credit ratings assigned by recognized
statistical rating organizations. If it is determined that a counterparty
requires credit enhancement, then one or more enhancement techniques will be
used. Examples of such enhancement techniques include letters of credit,
guarantees, collateral credit triggers and credit derivatives and margin
agreements.
A significant majority of AIGFP's transactions are contracted and
documented under ISDA Master Agreements. Management believes that such
agreements provide for legally enforceable set-off in the event of default.
Also, under such agreements, in connection with a counterparty desiring to
terminate a contract prior to maturity, AIGFP may be permitted to set-off its
receivables from that counterparty against AIGFP's payables to that same
counterparty arising out of all included transactions. Excluding regulated
exchange transactions, AIGTG, whenever possible, enters into netting agreements
with its counterparties which are similar in effect to those discussed above.
The following tables provide the notional and contractual amounts of
AIGFP's and AIGTG's derivatives transactions at June 30, 2001 and December 31,
2000.
The notional amounts used to express the extent of AIGFP's and AIGTG's
involvement in swap transactions represent a standard of measurement of the
volume of AIGFP's and AIGTG's swaps business. Notional amount is not a
quantification of market risk or credit risk and it may not necessarily be
recorded on the balance sheet. Notional amounts represent those amounts used to
calculate contractual cash flows to be exchanged and are not paid or received,
except for certain contracts such as currency swaps.
The timing and the amount of cash flows relating to AIGFP's and AIGTG's
foreign exchange forwards and exchange traded futures and options contracts are
determined by each of the respective contractual agreements.
The net replacement value most closely represents the net credit risk to
AIGFP or the maximum amount exposed to potential loss after the application of
the aforementioned strategies, netting under ISDA Master Agreements and applying
collateral held. Prior to the application of these credit enhancements, the
gross credit risk with respect to these derivative instruments was $51.1 billion
at June 30, 2001 and $33.4 billion at December 31, 2000. Subsequent to the
application of such credit enhancements, the net exposure to credit risk or the
net replacement value of all interest rate, currency and equity swaps, swaptions
and forward commitments approximated $10.07 billion at June 30, 2001 and $9.51
billion at December 31, 2000. The net replacement value for futures and forward
contracts approximated $185 million at June 30, 2001 and $204 million at
December 31, 2000. The net replacement value most closely represents the net
credit risk to AIGFP or the maximum amount exposed to potential loss.
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The following table presents AIGFP's derivatives portfolio by maturity and
type of derivative at June 30, 2001 and December 31, 2000:
(IN MILLIONS)
----------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
---------------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 2001 2000
----------------------------------------------------------------------------------------------------------------------------
Interest rate, currency and equity/commodity
swaps and swaptions:
Notional amount:
Interest rate swaps $ 75,278 $195,884 $ 89,281 $ 9,518 $369,961 $344,203
Currency swaps 29,711 51,959 34,220 4,970 120,860 117,792
Swaptions and equity swaps 15,103 26,040 10,900 3,770 55,813 59,026
----------------------------------------------------------------------------------------------------------------------------
Total $120,092 $273,883 $134,401 $18,258 $546,634 $521,021
----------------------------------------------------------------------------------------------------------------------------
Futures and forward contracts:
Exchange traded futures contracts contractual
amount $ 8,624 -- -- -- $ 8,624 $ 11,082
----------------------------------------------------------------------------------------------------------------------------
Over the counter forward contracts contractual
amount $ 47,337 $ 471 $ 189 -- $ 47,997 $ 22,809
----------------------------------------------------------------------------------------------------------------------------
AIGFP determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At June 30, 2001 and December
31, 2000, the counterparty credit quality by derivative product with respect to
the net replacement value of AIGFP's derivatives portfolio was as follows:
(IN MILLIONS)
-----------------------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE
------------------------------------
SWAPS AND FUTURES AND TOTAL TOTAL
SWAPTIONS FORWARD CONTRACTS 2001 2000
-----------------------------------------------------------------------------------------------------------------------------
Counterparty credit quality:
AAA $ 3,742 $ 15 $ 3,757 $3,778
AA 3,198 139 3,337 2,825
A 2,097 29 2,126 1,801
BBB 926 2 928 1,059
Below investment grade 110 -- 110 252
-----------------------------------------------------------------------------------------------------------------------------
Total $10,073 $185 $10,258 $9,715
-----------------------------------------------------------------------------------------------------------------------------
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At June 30, 2001 and December 31, 2000, the counterparty breakdown by
industry with respect to the net replacement value of AIGFP's derivatives
portfolio was as follows:
(IN MILLIONS)
-----------------------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE
------------------------------------
SWAPS AND FUTURES AND TOTAL TOTAL
SWAPTIONS FORWARD CONTRACTS 2001 2000
-----------------------------------------------------------------------------------------------------------------------------
Non-U.S. banks $ 2,543 $ 68 $ 2,611 $2,517
Insured municipalities 555 -- 555 595
U.S. industrials 2,004 -- 2,004 1,945
Governmental 481 -- 481 463
Non-U.S. financial service companies 426 1 427 309
Non-U.S. industrials 961 15 976 1,372
Special purpose 1,476 -- 1,476 1,204
U.S. banks 204 99 303 220
U.S. financial service companies 1,132 2 1,134 894
Supranationals 291 -- 291 196
-----------------------------------------------------------------------------------------------------------------------------
Total $10,073 $185 $10,258 $9,715
-----------------------------------------------------------------------------------------------------------------------------
The gross replacement values presented in the following table represent the
sum of the estimated positive fair values of all of AIGTG's derivatives
contracts at June 30, 2001 and December 31, 2000. These values do not represent
the credit risk to AIGTG.
The net replacement values presented represent the net sum of estimated
positive fair values after the application of legally enforceable master netting
agreements and collateral held. The net replacement values most closely
represent the net credit risk to AIGTG or the maximum amount exposed to
potential loss.
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The following table provides the contractual and notional amounts and
credit exposure, if applicable, by maturity and type of derivative of AIGTG's
derivatives portfolio at June 30, 2001 and December 31, 2000. In addition, the
estimated positive fair values associated with the derivatives portfolio are
also provided and include a maturity profile for the June 30, 2001 balances
based upon the expected timing of the future cash flows.
(IN MILLIONS)
----------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
---------------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 2001 2000
----------------------------------------------------------------------------------------------------------------------------
Contractual amount of futures, forwards and
options:
Exchange traded futures and options $ 9,329 $ 3,560 $ 20 $-- $ 12,909 $ 18,064
----------------------------------------------------------------------------------------------------------------------------
Forwards $224,936 $17,021 $ 1,675 $-- $243,632 $234,316
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Over the counter purchased options $ 87,242 $20,433 $34,761 $-- $142,436 $104,919
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Over the counter sold options(a) $ 83,757 $21,606 $33,983 $87 $139,433 $103,742
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Notional amount:
Interest rate swaps and forward rate
agreements $ 16,754 $34,628 $ 6,978 $85 $ 58,445 $ 63,264
Currency swaps 3,876 5,412 648 -- 9,936 8,573
Swaptions 1,390 13,333 1,311 -- 16,034 15,419
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Total $ 22,020 $53,373 $ 8,937 $85 $ 84,415 $ 87,256
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Credit exposure:
Futures, forwards, swaptions and purchased
options contracts and interest rate and
currency swaps:
Gross replacement value $ 6,277 $ 2,412 $ 981 $ 1 $ 9,671 $ 10,319
Master netting arrangements (3,714) (1,574) (725) (1) (6,014) (6,136)
Collateral (60) (49) (24) -- (133) (107)
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Net replacement value(b) $ 2,503 $ 789 $ 232 $-- $ 3,524 $ 4,076
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(a) Sold options obligate AIGTG to buy or sell the underlying item if the option
purchaser chooses to exercise. The amounts do not represent credit exposure.
(b) The net replacement values with respect to exchange traded futures and
options, forward contracts, and purchased over the counter options are
presented as a component of trading assets in the accompanying balance
sheet. The net replacement values with respect to interest rate and currency
swaps are presented as a component of unrealized gain on interest rate and
currency swaps, options and forward transactions in the accompanying balance
sheet.
AIGTG determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At June 30, 2001 and December
31, 2000, the counterparty credit quality and counterparty breakdown by industry
with respect to the net replacement value of AIGTG's derivatives portfolio were
as follows:
(IN MILLIONS)
------------------------------------------------------------
NET REPLACEMENT VALUE
----------------------
2001 2000
------------------------------------------------------------
Counterparty credit quality:
AAA $ 435 $ 442
AA 1,348 1,807
A 1,217 1,139
BBB 238 460
Below investment grade 76 48
Not externally rated, including
exchange traded futures and
options* 210 180
------------------------------------------------------------
Total $3,524 $4,076
------------------------------------------------------------
(IN MILLIONS)
------------------------------------------------------------
NET REPLACEMENT VALUE
----------------------
2001 2000
------------------------------------------------------------
Counterparty breakdown by industry:
Non-U.S. banks $1,288 $2,076
U.S. industrials 262 67
Governmental 78 70
Non-U.S. financial service
companies 308 282
Non-U.S. industrials 404 243
U.S. banks 651 468
U.S. financial service companies 323 690
Exchanges* 210 180
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Total $3,524 $4,076
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* Exchange traded futures and options are not deemed to have significant credit
exposure as the exchanges guarantee that every contract will be properly
settled on a daily basis.
Generally, AIG manages and operates its businesses in the currencies of the
local operating environment. Thus, exchange gains or losses occur when AIG's
foreign currency net investment is
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affected by changes in the foreign exchange rates relative to the U.S. dollar
from one reporting period to the next.
AIG, through its Foreign Exchange Operating Committee, evaluates each of
its worldwide consolidated foreign currency net asset or liability positions and
manages AIG's translation exposure to adverse movement in currency exchange
rates. AIG may use forward exchange contracts and purchase options where the
cost of such is reasonable and markets are liquid to reduce these exchange
translation exposures. The exchange gain or loss with respect to these hedging
instruments is recorded on an accrual basis as a component of comprehensive
income in capital funds.
As an end user, AIG and its subsidiaries, including its insurance
subsidiaries, use derivatives to aid in managing AIG's foreign exchange
translation exposure. Derivatives may also be used to minimize certain exposures
with respect to AIG's debt financing and its insurance operations; to date, such
activities have not been significant.
AIG has formed a Derivatives Review Committee. This committee, with certain
exceptions, provides an independent review of any proposed derivative
transaction. The committee examines, among other things, the nature and purpose
of the derivative transaction, its potential credit exposure, if any, and the
estimated benefits. This committee does not review those derivative transactions
entered into by AIGFP and AIGTG for their own accounts.
Legal risk arises from the uncertainty of the enforceability, through legal
or judicial processes, of the obligations of AIG's clients and counterparties,
including contractual provisions intended to reduce credit exposure by providing
for the netting of mutual obligations. (See also the discussion on master
netting agreements above.) AIG seeks to eliminate or minimize such uncertainty
through continuous consultation with internal and external legal advisors, both
domestically and abroad, in order to understand the nature of legal risk, to
improve documentation and to strengthen transaction structure.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities". In June 2000, FASB issued Statement of Financial
Accounting Standards No. 138 "Accounting for Derivative Instruments and Hedging
Activities-an amendment of FASB Statement No. 133" (collectively, FASB 133).
FASB 133 requires AIG to recognize all derivatives in the consolidated
balance sheet at fair value. The financial statement recognition of the change
in the fair value of a derivative depends on a number of factors, including the
intended use of the derivative and the extent to which the derivative is
effective as part of a hedge transaction. The changes in fair value of the
derivative transactions of AIGFP and AIGTG are currently presented, in all
material respects, as a component of AIG's operating income. The discussion
below relates to the derivative activities of AIG other than those of AIGFP and
AIGTG.
On the date the derivative contract is entered into, AIG designates the
derivative as: (1) a hedge of the subsequent changes in the fair value of a
recognized asset or liability or of an unrecognized firm commitment ("fair
value" hedge); (2) a hedge of a forecasted transaction, or the variability of
cash flows to be received or paid related to a recognized asset or liability
("cash flow" hedge); or (3) a hedge of a net investment in a foreign operation.
Fair value and cash flow hedges may involve foreign currencies ("foreign
currency hedges"). The gain or loss in the fair value of a derivative that is
designated, qualifies and is highly effective as a fair value hedge is recorded
in current period earnings, along with the loss or gain on the hedged item
attributable to the hedged risk. The gain or loss in the fair value of a
derivative that is designated, qualifies and is highly effective as a cash flow
hedge is recorded in other comprehensive income, until earnings are affected by
the variability of cash flows. The gain or loss in the fair value of a
derivative that is designated, qualifies and is highly effective as a hedge of a
net investment in a foreign operation is recorded in the foreign currency
translation adjustments account within other comprehensive income. Changes in
the fair value of derivatives used for other than the above hedging activities
are reported in current period earnings.
AIG documents all relationships between hedging instruments and hedged
items, as well as its risk-management objectives and strategy for undertaking
various hedge transactions. This process includes linking all derivatives that
are designated as hedges to specific assets or liabilities on the balance sheet,
or specific firm commitments or forecasted transactions. AIG also assesses, both
at the hedge's inception and on an ongoing basis, whether the derivatives used
in hedging transactions are highly effective in offsetting changes in fair
values or cash flows of hedged items.
AIG adopted FASB 133 on January 1, 2001. In accordance with the transition
provisions of FASB 133, AIG recorded in its consolidated income statement for
the first six months of 2001 a cumulative effect of an accounting change
adjustment loss of $6 million. This amount is presented as a component of Other
income (deductions)-net. This loss represents the net fair value of all
previously unrecorded derivative instruments as of January 1, 2001, net of tax
and after the application of hedge accounting. AIG also recorded in its
consolidated statement of comprehensive income for the first six months of 2001
a cumulative effect of an accounting change adjustment gain of $150 million.
This gain represents the increase in other comprehensive income, net of taxes,
arising from recognizing the fair value of all derivative contracts designated
as cash flow hedging instruments, and to a lesser extent, hedging instruments
used to hedge net investments in foreign operations.
In June 2001, FASB issued Statement of Financial Accounting Standard No.
141 "Business Combinations" (FASB 141). FASB 141 requires AIG to apply the
purchase method of accounting for all acquisitions initiated after June 30,
2001.
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American International Group, Inc. and Subsidiaries
In June 2001, FASB issued Statement of Financial Accounting Standard No.
142 "Goodwill and Other Intangible Assets" (FASB 142). FASB 142 requires AIG to
discontinue the amortization of goodwill on its consolidated income statement.
FASB 142 is effective for AIG for the year commencing January 1, 2002.
In addition, FASB 142 requires goodwill to be subject to an assessment of
impairment on an annual basis, or more frequently if circumstances indicate that
a possible impairment has occurred. As of June 30, 2001, AIG recorded $4.8
billion of goodwill on its consolidated balance sheet. AIG is currently
evaluating the impact of the impairment provisions of FASB 142, and believes
that the impact on its results of operations and financial condition will not be
significant.
RECENT DEVELOPMENTS
On April 20, 2001, AIG announced that the reorganization plan for The Chiyoda
Mutual Life Insurance Company (Chiyoda) had been approved by Japanese regulatory
authorities, and that Chiyoda had become a joint-stock company and commenced
operations as AIG Star Life Insurance Co., Ltd., a wholly owned subsidiary of
AIG.
On May 11, 2001, AIG announced that it has entered into a definitive
agreement to acquire American General Corporation (AGC). American General
shareholders will receive $46 per American General share in AIG common stock,
subject to a collar mechanism. The transaction, which has been approved by the
boards of directors of both companies, will be a tax-free reorganization and
will be accounted for using the pooling of interests method. The transaction
values American General at approximately $23 billion. AIG expects to receive the
remaining regulatory approvals for the acquisition in August and plans to close
the transaction as soon as possible thereafter.
SUBSEQUENT EVENTS
AIG continues to update the estimates of its total expected net losses resulting
from the terrorist attacks of September 11, 2001. It is impossible for any
company to precisely estimate its total losses at the current time. Although
AIG's property insurance coverages on the World Trade Center complex are minor,
AIG expects ultimately to receive claims from many insureds across a wide range
of coverages. Based on the information available at the current time, AIG's net
pre-tax losses are expected to approximate $800 million.
On August 29, 2001, AIG acquired AGC in a transaction accounted for as a
pooling of interests. As a result, all financial information presented herein
for the combined entity reflects the results of AGC as if AGC had been
consolidated for all periods presented. It is estimated that the combined entity
will incur one-time pre-tax costs of approximately $1.3 billion in the third
quarter of 2001 ($950 million after tax) with additional less significant costs
expected to be incurred in the fourth quarter of 2001 and in 2002 and 2003
related to the ongoing integration of operations.
Approximately 40 percent of the one-time costs incurred in the third
quarter are related to direct costs with respect to the acquisition such as
investment banking, legal and accounting fees, employee severance and other
termination benefits, and other compensation costs related to change in control
provisions applicable to AGC executives. Also included in one-time costs are
charges resulting from post-business combination plans. Such charges recognize
that certain assets will have no future economic benefit or ability to generate
future revenues. Such costs include asset impairment charges related to
software, leasehold improvements and certain goodwill related to such operations
as part of the post-business combination plans. Also included are certain
adjustments associated with conforming AGC's balances to AIG's existing
accounting policies and methodologies.
Ongoing costs with respect to the integration of operations will be
expensed in future periods as incurred. AIG expects that these ongoing costs
will include costs for the integration of computer systems, the training and
relocation of certain employees and the consolidation of facilities.
As previously stated, AIG ultimately anticipates annual savings of
approximately $400 million from the business combination, reflecting principally
the benefits of reductions in redundant operations.
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ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) EXHIBITS.
12 Supplemental Computation of Ratios of Earnings to Fixed
Charges
23 Consents of Independent Accountants
99.1 Financial Statement Schedules:
I -- Summary of Investments -- Other Than Investments in
Related Parties as of December 31, 2000
II -- Condensed Financial Information of Registrant as of
December 31, 2000 and 1999 and for the years ended December
31, 2000, 1999 and 1998
III -- Supplementary Insurance Information as of December
31, 2000, 1999 and 1998 and for the years then ended
IV -- Reinsurance as of December 31, 2000, 1999 and 1998 and
for the years then ended
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMERICAN INTERNATIONAL GROUP, INC.
(Registrant)
By /s/ HOWARD I. SMITH
----------------------------------------------
Name: Howard I. Smith
Title: Executive Vice President and
Chief Financial Officer
Date: October 9, 2001
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- ----------- LOCATION
12 Supplemental Computation of Ratios of Earnings to Fixed Filed herewith.
Charges
23 Consents of Independent Accountants Filed herewith.
99.1 Financial Statement Schedules: Filed herewith.
I -- Summary of Investments -- Other Than Investments in
Related Parties as of December 31, 2000
II -- Condensed Financial Information of Registrant as of
December 31, 2000 and 1999 and for the years ended December
31, 2000, 1999 and 1998
III -- Supplementary Insurance Information as of December
31, 2000, 1999 and 1998 and for the years then ended
IV -- Reinsurance as of December 31, 2000, 1999 and 1998 and
for the years then ended
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